Early Retirement Window for One Participant

[401 Chaos]

I am looking for guidance with respect to early retirement windows and specifically just how narrowly an early retirement "window" may be under a defined benefit plan. Can anybody recommend a good resource that discusses the various issues or concerns associated with providing early retirement benefits? So far I have not been able to find a detailed discussion in the ERISA Outline book but wonder if I've missed that.

What are the issues if a plan wants to basically provide one particuar employee with a enhanced age and service credit (say 5 and 5) under the plan's regular early retirement formula. The participant is an NHCE earning $50k per year. The plan has never provided early retirement windows / benefits before. Plan is currently frozen and basically underfunded.

[SoCalActuary]

Your AFTAP will determine if the amendment can be done. Otherwise, it looks fine, because it is not a discriminatory amendment.

[401 Chaos]

Thanks SoCal. Assuming the AFTAP will permit the amendment, I wonder if you ever see plans and plan sponsors run into trouble doing these sorts of things? Even if that's trouble outside the plan where the special arrangements create a precedent with respect to other NHCEs that may be let go in the future shy of maximum years of service. Also, any reason to worry about this from general fiduciary perspective? Even if the plan can cover the special provisions now, the long-term economic prognosis for the plan sponsor is not great which, in part, led to the prior plan freeze. If I were a participant and found out about a special deal for one individual that potentially left the plan less sound for other participants, it would at least cause me to scratch my head. If I were terminated and didn't get a similar deal, however, I'd really be asking questions I think.

[My 2 cents]

Three things:

1. Whether the AFTAP would permit it must be determined taking the extra benefit values into account. To be on the safe side, if the window would allow the non-HCE to take a lump sum, you should look at what the assets would be if the lump sum (the real lump sum, not the value based on the funding segment rates) were paid compared to the target liability with the person excluded. In the normal early retirement window situation (with a number of people eligible to choose to take the window), you probably should do this assuming 100% take the window.

2. I have never heard of an early retirement window that applied to anyone but active participants. The whole point behind an early retirement window is not to pay bigger benefits but to reduce payroll and related costs. So people already terminated are always going to be excluded.

3. With only one person eligible for the window, you REALLY have to scrutinize everything said and done to ensure that there is absolutely no hint of coercion. You have to make sure it is clearly understood that if the person does not want to take the window, then there is no reason whatsoever for that person to be concerned that they are near the front of the line anyway. The person having greater than average seniority, it should probably be expected that if they don't want to take the offer, then any reductions in force will tend to target younger, shorter service employees.

[401 Chaos]

Thanks. My concern about other terminated participants being upset was really focusing on currently active participants who may later be terminated but not offered the same deal but I guess former employees still participating in the plan could gripe as well.

The third point raises lots of concerns because, under these facts, the individual would likely be let go first (and may be gone no matter what). The extra benefits in this case probably function more like severance than a typical window program with the primary aim to reduce a target number of employees but no pre-set determination as to who should take it.

[david rigby]

I agree with above comments. A ERW for one NHCE will not be discriminatory, assuming the AFTAP permits a plan amendment.

There could be other (associated) PR / HR issues, but those are (probably) not ERISA issues.

The Q about fiduciary duty is a good one, and the fiduciary should seek advice from an ERISA attorney.