Maximum Accrued Benefit

[Dougsbpc]

Have a small take-over DB plan with a volume submitter document.

The plan has a provision that places a maximum on accrued benefits of $5,000 per month. The prior administrator limited accrued benefits of the two owner employees to $5,000. However, one of the owners is two years past NRA and it appears no actuarial adjustment was made. In this case the owner who is past NRA does not care. Is it permissible to limit accrued benefits and not provide an actuarial adjustment?

[Andy the Actuary]

Sounds like a forfeiture of accrued benefits to me.

[FAPInJax]

The plan could have the maximum benefit and provide for the owner to receive a suspension of benefits notice. This basically says that you will receive the benefit from the formula without AE increases.

I believe the only issue is that at 70 1/2 the notice is no longer applicable and all the increases trigger. (He needs to be out of the plan <GGG>)

[Jim Norman]

Need to read & interpret the plan document sections dealing with late retirement and the maximum benefit cap. Does the cap language trump a post retirement actuarial increase provision or not? I would guess not, assuming the cap applies to the normal retirement benefit.

[Effen]

Does the cap language trump a post retirement actuarial increase provision or not?

As FAPinJax points out, if you didn't give them a suspension notice, it doesn't really matter what the document says. If you didn't give them a notice, they need to get an actuarial increase.

[Dougsbpc]

Thanks everyone for the replies on this.

It is interesting, the adoption agreement has the following provisions:

5-5 Benefit limits

(i) Maximum benefit limit. A Participant's Accrued Benefit shall not exceed $5,000.

7-4 Late Retirement Benefit

(b) The following rules apply with respect to determining a Participant’s Accrued Benefit that commences after Normal Retirement Age: Unless a maximum benefit is designated under 5-5(i), the Participant’s Accrued Benefit as

of the end of each Plan Year beginning after the Participant’s Normal Retirement Date is the greater of (1) the

Participant’s Normal Retirement Benefit, calculated taking into account the Participant’s compensation and Years of

Credited Service as of the end of such Plan Year or (2) the Participant’s Accrued Benefit determined as of the end of

the prior Plan Year, expressed as an Actuarial Equivalent benefit as of the end of the current Plan Year. In calculating

the Participant’s Normal Retirement Benefit under (1), such amount is offset by the actuarial value of any distributions

received from the Plan prior to the close of the Plan Year.

The document has the following provision:

Late Retirement Benefit.

(a) Amount of Late Retirement Benefit. Unless designated otherwise under 7-4(b), if the payment of a

Participant’s Accrued Benefit commences after his/her Normal Retirement Date, the Participant’s Accrued Benefit as

of the end of each Plan Year beginning after the Participant’s Normal Retirement Date is the greater of (1) the

Participant’s Normal Retirement Benefit, calculated taking into account the Participant’s compensation and Years of

Credited Service as of the end of such Plan Year or (2) the Participant’s Accrued Benefit determined as of the end of

the prior Plan Year, expressed as an Actuarial Equivalent benefit as of the end of the current Plan Year. In calculating

the Participant’s Normal Retirement Benefit under (1), such amount is offset by the actuarial value of any distributions

received from the Plan prior to the close of the Plan Year.

[Effen]

so my option would be that a SOB notice isn't necessary since the document gives the greater of the two anyway. However I would argue the document language is a little lacking since in the first year after NRD it should be the accrued benefit as of NRD that is rolled up. That language seemed to imply it was the accrued benefit at the end of the prior year.

Also, I have heard IRS rumblings that the plan still should give an SOB notice or it would be forced to give both the rollup and the age/service accrual. I can't remember the exact context, but I remember being a bit surprised when I heard/read it.