NRA of 62, Subsidized ERB at 55

[JAY21]

I know this has been discussed before, but how aggressive do you feel it is on say a 1 person plan (new plan) to use an NRA of 62, and a ERA of 55 with the ERB fully subsidized at 55 with a 99.99% funding assumption that the owner will take the ERB at 55. Does this sucessfully weave through the concerns of the IRS on post-NRA distributions being done on a reasonable NRA (in this case 62) but still allow us to use 55 for funding ?

I'd appreciate a few votes. On a scale of 1-10 with 10 being VERY aggressive where do you put this strategy ? I "think" the IRS has verbally offered some support for this strategy, or at least not kaboshed it outright, but correct me if I'm wrong.

[Andy the Actuary]

Vote that this would be okay so long as no in-service distribution taken at age 55 before the Plan has terminated. Why would you believe your position is agressive?

[JAY21]

Andy I don't know that it is aggressive, just not sure that's it's not. I like the approach but before I buy into it wholesale it's helpful to get some input from others.

[Effen]

I agree with Andy on both fronts. It's ok, it's not aggressive (assuming the assumption is really valid). In fact, I would use 100% assumed at 55 and not 99.99%, if I felt it was reasonable.

As long as your plan provides an unreduced ben at 55, with no in-service distribution until 65, I think you are ok. If your participant actually retires at 55, he is entitled to a full benefit.

Now, you might want to make sure you can justify your assumption. Getting the participant to sign something telling you they intend to retire at 55 wouldn't be a bad idea.

[mwyatt]

This very question was asked of Jim Holland (by me) at the EA Meeting last spring. He had absolutely no problem with this type of approach. In point of fact, the target for once wasn't small plans at all, but rather overaggressive CB designs (allowing for immediate rollover of additions to get around the interest credit) and believe it or not public plans. Reality under PPA funding with a benefit being funded to the 415 dollar limit anyway is that it doesn't make much of a difference in the contribution ranges. Can be an issue for lower compensation 1 man plans though.

The IRS hasn't even requested to see Schedule B/SBs on EZ filers since 2005, so this indicates that the small plan market was more collateral damage in this issue. Up here in MA we're dealing with public transportation plans having guys "retire" in their 40s with benefits substantially (I mean factors of 2) over the 415 dollar limit. Bigger targets out there than our 1 person plans.

[Andy the Actuary]

The Eff-ster makes an excellent point: Namely, 99% makes it look as if you're trying to subterfuge when not the case.

The part about obtaining an affadavid about retiring at 55 may be unnecessary and certainly though it sounds lovely would not be binding. The issue will not be when the person retires but when the plan terminates, which could be before age 55.