Early Retirement Reductions?

[Guest jfreeborn]

Hello

I am wondering if there are any IRS regulations on point, and if most plans reduce for early retirement in the same manner as the following plan provision? The plan administrator interprets the provision to mean that there are NO partial years for an early retirement reduction. Therefore, if you are 55 and 11/12th, you have a reduction factor of 10 (assuming 65 NRA), instead of 9 1/12th. Basically, they round up. Is that ok?

"An eligible Participant's monthly early retirement benefit shall be equal to his Accrued Benefit on the date of his early retirement; provided, however, that if the sum of the Participant's age and years of Service as of his Annuity Starting Date does not equal at least 85, the amount of such benefit shall be reduced by the smaller of (i) 2 1/2 percent for each year or fraction thereof by which his age on his Annuity Starting Date precedes age 65 or (ii) 2 1/2 percent for each year or fraction thereof by which the sum of his age and years of Service at his Annuity Starting Date is less than 85."

[david rigby]

What does "... or fraction thereof..." mean to you?

In my observation, interpolation is nearly universal. Computers have made this task a trivial one.

[SoCalActuary]

I would follow the terms of the plan as written. No interpolation is called for in this language.

59 years 11 months 29 days is not age 60, so the reduction applies.

[Guest jfreeborn]

What does "... or fraction thereof..." mean to you?

In my observation, interpolation is nearly universal. Computers have made this task a trivial one.

Well, that is the key aspect of this situation. I guess "or fraction thereof" could mean if there is not a whole years difference, then use a fraction of a year. On the other hand, it could mean, to use whole years and fractions.

What do most plans do?

[GMK]

2 1/2 percent for each year or fraction thereof

To my (totally unfamiliar with this) mind, this says 2 1/2 percent for each full year and 2 1/2 percent for each fractional year. But I'm just reading what it says.

[Effen]

If it is unclear you need to look at past precedents and ask the sponsor for an interpretation. Don't take the responsibility for interpreting a plan provision that isn't clear. Unless you are the plan sponsor, this shouldn't be your call.

For me, it says to reduce for fractional years, that means interpolate in my book, but obviously, it isn't my decision.

[David MacLennan]

The document clearly says to NOT interpolate. Plus, the plan sponsor can interpret the document in virtually any way they want, as long as they are consistent.