Accrued Benefit - Late Retirement

[JBones]

A plan document provides for a normal retirement benefit of a flat percentage of high 3 year pay - 254%, reduced for years of participation at retirement less than 25. The benefit is accrued fractionally over years of participation. NRA is later of 65 & 5th anniversary of participation.

Participant enters plan at age 66, so his NRA is determined by 5 years of participation and his normal retirement benefit before the accrual fraction is 254%*5/25=50.8% and has been for each of the last 5 years.

If he continues in employment past retirement, will his NRB reduction fraction increase for additional years of participation, i.e. would next year be 254%*6/25 = 60.96%?

[Effen]

I would say "yes", but you need to check your document to see how to determine the late retirement benefit.

Did you give the participant a 204(h) notice (suspension of benefits)?. If not, you need to check the actuarially increased ben at NRD to NRD+1. Also, depending on what the document says (or not), you would need to give the greater of the two, or maybe even both the accrual and the actuarial increase.

[Guest VEBAPLAN]

You may want to ask someone who knows this stuff VEBA GURU

[JBones]

Thanks Effen. There was no 204(h) notice, it is a takeover plan that just came to me recently and I'm still reviewing the facts before going back to the client. The late retirement benefit section of the document says they receive greater of continued accruals or actuarial increase. The participant began RMDs on his NRA, so I think that I should be okay without providing actuarial increases since no payments were delayed past NRD. Leaving the question: "Are there any future accruals, or is the participant fully accrued?"

I would have thought he was fully accrued since the benefit reduction was pro-rata for each year less than 25 that a participant would have at Normal Retirement Date. (I realized that I left the "at Normal Retirement Date" part out of my original post and that may have changed the answer). In this case that fraction would be 5/25 and service rendered after NRD wouldn't affect this fraction. My thought is that going forward, his benefit will only be adjusted annually for changes in average compensation.

[ScottR]

I would think that, at the very least, he'd have to get the formula benefit based on salary and service thru late retirement date. It's no longer permissible to freeze accruals at NRD, is it?

[SoCalActuary]

A plan document provides for a normal retirement benefit of a flat percentage of high 3 year pay - 254%, reduced for years of participation at retirement less than 25. The benefit is accrued fractionally over years of participation. NRA is later of 65 & 5th anniversary of participation.

Participant enters plan at age 66, so his NRA is determined by 5 years of participation and his normal retirement benefit before the accrual fraction is 254%*5/25=50.8% and has been for each of the last 5 years.

If he continues in employment past retirement, will his NRB reduction fraction increase for additional years of participation, i.e. would next year be 254%*6/25 = 60.96%?

Yes, the regular formula would produce your 60+% formula. But many plan documents also reduce the benefit for the actuarial equivalent of all past distributions. This is usually document specific, in that you must look to the actual wording in the plan to see if the reduction applies.

In this example, if the participant took a benefit payment at 50.8% of pay after year 5, that translates into about 4 to 5% of pay for life, using interest adjustment to the next benefit determination date and normal actuarial assumptions.

So the net benefit would be 60.96% - 5% or a net benefit of about 56% of pay.