Normal Retirement Age

[Gary]

I am going to prepare a new DB plan document for a client.

My understanding is that NRA must be set at at least age 62 unless the typical retirement age in the particulat industry is justifiably less than 62.

My simple solution to use age 62 is as follows:

Set NRA to age 62 and have early retirement begin at age 55 with fully subsidized benefit. That is, accrued benefit with no reduction for early retirement.

This way the plan can use an assumed age 55 retirement while meeting the age 62 requirement for in-service distributions.

Any thoughts with this approach?

Thanks

[Andy the Actuary]

These regs seem much ado about nada. Your approach sounds fine so long as no common law employees.

The question is what retirement ages you assume for funding.

The only critical issue is if at 55 the participant wants his/her benefit, he/she either must terminate the plan or retire from work.

[david rigby]

The other critical issue is whether 55 is an assumption chosen based on when actual retirement is anticipated, or is it chosen for some other reason?

[Gary]

What would be the problem if there were common law employees?

Of course I could assume they retire at 62 anyway.

Yes, I agree they need to terminate or retire to receive pension before 62.

Thanks.

[AndyH]

This concept (compliant NRA, subsidized ERA) was the subject of a Gray Book Q&A this year and the answer was supportive of this approach because the basic intent is to prevent in-service distributions at bogus NRAs. (As Tom Finnegan stated here a year or two ago).

[Andy the Actuary]

What would be the problem if there were common law employees?

Of course I could assume they retire at 62 anyway.

Yes, I agree they need to terminate or retire to receive pension before 62.

Thanks.

Problem with common law employees might be the benefits cost of providing unreduced benefits at age 55.

[david rigby]

Here is the Gray Book Q&A mentioned by AndyH (not exactly on point to the orginal question, but it may be useful):

Gray Book 2009-37

PPA: Other DB Plan Issues: Required Change to Normal Retirement Age

Where data is not available, or contractual requirements limit the option of retrenching on a plan’s current low normal retirement date, what options are available for meeting the regulatory requirements for such provisions?

RESPONSE

The regulation on normal retirement dates requires that a normal retirement age be an age, and requires justification for setting the age below age 62 as permitted by PPA. One issue of concern to the Service is allowing in-service payment. Plans may be amended to add an acceptable NRD while adding an early retirement provision based on the current NRD so that participants who actually retire are provided the same benefit as provided by the current plan.

The above Response is a summary, prepared by representatives of the Program Committee, of the oral responses to the question posed to certain staff members of the Treasury and IRS, which represent only personal views of the individuals who provided them. Accordingly, the Response does not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any taxpayer for any purpose.

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[SoCalActuary]

What would be the problem if there were common law employees?

Of course I could assume they retire at 62 anyway.

Yes, I agree they need to terminate or retire to receive pension before 62.

Thanks.

Problem with common law employees might be the benefits cost of providing unreduced benefits at age 55.

Don't forget the issue of discrimination testing. The Most Valuable Benefit determination for 401(a)(4) needs to consider the potential benefit payable at 55.

Also, define the actuarial equivalent benefit for termination of employment before age 55. Is it the actuarial equivalent of the age 55 or the age 62 benefit? How will lump sum rules work?