Fully subsidized ER

[RLR]

We have a small DB plan that had RA of 55 and we changed to RA 62 with a fully subsidized ER benefit at 55. The owner is at the 415 limit. My concern is that should the plan terminate when the owner is under 55, we could have a overfunding problem. We use the Corbel DB prototype and my interpretation is that distributions made prior to ER would be calculated using age 62 factors. Is this pretty much standard? Anything we can do to prevent this problem?

[Effen]

Even though you changed RA to 62, it should have only applied to post amendment accruals, otherwise you have a 411(d)(6) violation. Benefits accrued prior to the amendment are still payable at 55. If the plan now delays the right to receive that benefit until age 62 or seperation from service, I think you should actuarially increase the benefit payable at age 55 until the distribution or anticiapted distribution date, not to exceed the 415 limit for that age.

[RLR]

Even though you changed RA to 62, it should have only applied to post amendment accruals, otherwise you have a 411(d)(6) violation. Benefits accrued prior to the amendment are still payable at 55. If the plan now delays the right to receive that benefit until age 62 or seperation from service, I think you should actuarially increase the benefit payable at age 55 until the distribution or anticiapted distribution date, not to exceed the 415 limit for that age.

Sorry I wasn't totally clear. Accrued benefits at the time of the amendment were preserved and available at age 55. By having an ER benefit fully subsidized at 55 there really is no differnece in what's payable at tne new ER verses the old NR (we modified the benefit formula so that the accruals each year are the same as before the amendment).

[Andy the Actuary]

Does your 415 problem go away if the Plan is amended to allow for immediate unreduced retirement at 55?

[RLR]

Does your 415 problem go away if the Plan is amended to allow for immediate unreduced retirement at 55?

The plan amendment adds a fully subsidized benefit so if someone retires at 55 they receive an unreduced benefit. The 415 problem, as I see it, would arise when someone (the owner) retires before age 55 or the plan terminates before the owner reaches 55. Then the benefits would be reduced for commencement before RA 62.

[SoCalActuary]

Does your 415 problem go away if the Plan is amended to allow for immediate unreduced retirement at 55?

The plan amendment adds a fully subsidized benefit so if someone retires at 55 they receive an unreduced benefit. The 415 problem, as I see it, would arise when someone (the owner) retires before age 55 or the plan terminates before the owner reaches 55. Then the benefits would be reduced for commencement before RA 62.

So what? It already applies. The 415 limit at 55 is smaller, both in monthly benefit and lump sum than a payment at 62. But they are sort of actuarial equivalents. The benefit at 55 would be about $11,000 monthly, while the benefit at 62 would be $16,250.

What's your point?

[RLR]

Does your 415 problem go away if the Plan is amended to allow for immediate unreduced retirement at 55?

The plan amendment adds a fully subsidized benefit so if someone retires at 55 they receive an unreduced benefit. The 415 problem, as I see it, would arise when someone (the owner) retires before age 55 or the plan terminates before the owner reaches 55. Then the benefits would be reduced for commencement before RA 62.

So what? It already applies. The 415 limit at 55 is smaller, both in monthly benefit and lump sum than a payment at 62. But they are sort of actuarial equivalents. The benefit at 55 would be about $11,000 monthly, while the benefit at 62 would be $16,250.

What's your point?

If the owner retires at age 55 and his mo. benefit is w/in the 415 limit, his PV would be calculated using age 55 factors because there would be no reduction for ER. If he retires at 49 he is not eligible for the unreduced ER benefit so his PV would be calculated using age 62 factors. At least this is how I see it. This could potentially cause an excess in the plan.

[Calavera]

I think you have to preserve the value of the early retirement subsidy. Therefore I would use deferred to 55 factors for calculating plan’s lump sum. The 415 calculation will use the immediate factors at 49.

You can also amend the plan to change the early retirement age from 55 to 49.