Accrued Benefit Decreases?

[carrots]

What is the current IRS position on decreases in accrued benefits due to increases in covered compensation? Is that allowed?

If the accrued benefit at 12/31/2009 = (5% x AMC x YOP) + (.5% x (AMC - 2009CC) x YOP),

can the accrued benefit at 3/15/2010 = (5% x AMC x YOP) + (.5% x (AMC - 2010CC) x YOP)?

AMC and YOP are the same, but the 2010CC exceeds the 2009CC, thereby producing a lower AB.

Does the 12/31/2009 AB have to be protected?

[david rigby]

Will you accept a Gray Book response?

Gray Book 2008-42

May an accrued benefit decrease during continued employment due to any of the following:

a) Increases in a Social Security offset?

b) Increases in covered compensation?

c) Reductions in average compensation?

d) Reductions in the maximum benefit limitations under 415 (other than legislation or changes in response to a variable index)?

e) Investment performance underlying a variable annuity?

RESPONSE

a) Yes, but only to the extent that the offset meets the restrictions specified in Rev. Rule 84-45 and is in keeping with the qualification rule stated in IRC §401(a)(15).

b) and c) No. In this situation, the reduction would be on account of increasing service since the reduction would not occur if the participant terminated employment. A reduction in benefits due to increases in age or service would violate IRC §411(b)(1)(G). This was the rationale behind the answer to Question 33 from the 2003 Gray Book which dealt with situation c) above.

d) Where a post age 65 actuarial increase would be limited by the compensation limit as capped by IRC §401(a)(17), the benefits must be started, or “suspended”, to avoid an impermissible forfeiture. Benefits accrued prior to the IRC §415 regulatory effective date would be insulated from having to make this change and could continue to provide actuarial increases in spite of the 401(a)(17) limit. In addition, note that for benefits accrued after the regulatory effective date and prior to adoption of plan amendments, regulation §1.411(d)-3 would limit the ability to add a suspension of benefits approach. Moreover, for participants who have attained age 70-1/2, suspension of benefits would generally not be permitted.

e) Yes. In this case the reduction is not on account of age, service or plan amendment.

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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[carrots]

Thanks, David. I thought I had seen that somewhere. I don't agree with the IRS's position but, as that great man, Ed Burrows, once said, "It's their ballgame!"

[David MacLennan]

The reasoning for b & c is so lame - it's really absurd IMO. I'm all for giving a participant a break, but I wish they would just say to the effect "we strongly advocate give them a break" and not invent an absurd reason for it that invites disrespect of all the rules.