Accrued Benefit Calculation High 5 of last 10

[emmetttrudy]

Let's say a participant's high 5 of last 10 for his Average Monthly Comp is currently $50,000. The participant continues to work for another 10 years at a much lower comp rate so upon termination high 5 of last 10 is $25,000. His/her final accrued benefit is calculated using the $25,000, correct? The plan defines AMC as high 5 of 10 Years of Service where Year of Service is defined as 1,000 hours worked.

[Andy the Actuary]

Not necessarily. See 1.411(a)-7© that provides that Normal Retirement Benefit is the greater of any early retirement benefit or accrued benefit under the formula.

[emmetttrudy]

So what's the advantage or point to defining AMC as the high 5 of last 10, when really it would have to be high 5 over the career?

[david rigby]

I think the answer to the original question is Yes, and Andy's comment is also correct.

IRC 411(a)(9) provides that the NRB cannot be less than the ERB, without regard to the minutia (sp?) of how the benefit is calculated.

You may also wish to note the IRS opinion conveyed in the 2008 Gray Book here:

http://benefitslink.com/boards/index.php?showtopic=46419

[Andy the Actuary]

So what's the advantage or point to defining AMC as the high 5 of last 10, when really it would have to be high 5 over the career?

Advantage would be if the Plan does not provide for early retirement. Then, accrued benefit could decrease because the decrease is not owing to an increase in age or service. However, would recommend that affected participants be advised that they will lose pension by continuing to work.

[My 2 cents]

Is this how it would work?

Accrued benefit as of date pay drops = (for example) 1% X 10 years of service X $50,000 average pay = $5,000

Accrued benefit 8 years later = 1% X 18 years X $50,000 (still) = $9,000, eligible to retire and receive $7,000/month

Accrued benefit 8 years after that = 1% X 26 years X $25,000 = $6,500, but may need to base accrued benefit on $9,000 accrued at earlier date. $7,000 applies as minimum immediate benefit

Accrued benefit 5 years after that, at NRA = 1% X 31 X $25,000 = $7,750. May have to protect higher accrued benefit of $9,000.

You do NOT have to use $50,000 in conjunction with service earned after average pay begins to decline. Any protection to be offered would be in the form of a pure wearaway calculation.

[Andy the Actuary]

Is this how it would work?

Accrued benefit as of date pay drops = (for example) 1% X 10 years of service X $50,000 average pay = $5,000

Accrued benefit 8 years later = 1% X 18 years X $50,000 (still) = $9,000, eligible to retire and receive $7,000/month

Accrued benefit 8 years after that = 1% X 26 years X $25,000 = $6,500, but may need to base accrued benefit on $9,000 accrued at earlier date. $7,000 applies as minimum immediate benefit

Accrued benefit 5 years after that, at NRA = 1% X 31 X $25,000 = $7,750. May have to protect higher accrued benefit of $9,000.

You do NOT have to use $50,000 in conjunction with service earned after average pay begins to decline. Any protection to be offered would be in the form of a pure wearaway calculation.

While wear-away (because of compensation decrease) makes the most sense as a plan design, where does the code/regulations say it must apply? Unless I've overlooked some provision, the only wear-away appears to be with the early retirement language in 1.411(a)-7©

[My 2 cents]

Protecting just the immediately payable benefit is OK with me if it is OK with the IRS.

The IRS certainly would consider someone as being entitled to wear-away protection, even before earliest retirement age, if the accrued benefit would be adversely affected by recognition of an increase in Social Security covered compensation. Do they consider the operation of a limited period for compensation averaging the same way?

[Andy the Actuary]

Protecting just the immediately payable benefit is OK with me if it is OK with the IRS.

The IRS certainly would consider someone as being entitled to wear-away protection, even before earliest retirement age, if the accrued benefit would be adversely affected by recognition of an increase in Social Security covered compensation. Do they consider the operation of a limited period for compensation averaging the same way?

Only if you ask them!!!!

[Mike Preston]

It has been asked of them and wearaway is their answer.

[Andy the Actuary]

It has been asked of them and wearaway is their answer.

You knew this was coming: Do you have a written source?

[AndyH]

Isn't the Gray Book Q&A that David linked the written source? I doubt there is anything more formal than that in print, but if there is Mike will shirley know where it is.

[Effen]

Why would Shirely know where Mike's stuff is?

(Sorry, just couldn't resist. OK, back to AFTAP's and SBs)

[AndyH]

Why would Shirely know where Mike's stuff is?

(Sorry, just couldn't resist. OK, back to AFTAP's and SBs)

Roger, Striker. And do you like movies about Gladiators?

[david rigby]

Isn't the Gray Book Q&A that David linked the written source? I doubt there is anything more formal than that in print

Using the word "source" may a bit fuzzy. Sometimes the Gray Book is really good, sometimes not.

IMHO, there is zero chance that the IRS (and the DOL for that matter) will ever take a position different from the Q&A linked above. Simply put, you do not want to fight the IRS on this; you will lose, and the resulting publicity will not be pretty.

[Mike Preston]

Neither Mike nor Shirley know of anything more specific than what has already been stated in this thread, as far as writings go. I personally asked Ira Cohen this question "way back when" and from that day forward I grandfathered with wearaway.

[Andy the Actuary]

Neither Mike nor Shirley know of anything more specific than what has already been stated in this thread, as far as writings go. I personally asked Ira Cohen this question "way back when" and from that day forward I grandfathered with wearaway.

Again, agree with wearaway making perfect sense and is the appropriate treatment. It, however, makes even better sense when the plan language provides for it. In short, I would follow such approach. Being from Missoura, however, it was incumbent upon me to request, "show me."