415 limits and actuarial increases

[Gary]

A plan freezes their benefits as of 12/31/2007.

Only one participant in plan.

As of 12/31/2007 the participant has a monthly benefit of 8,700 and the 415 limit of 100% of avg comp is 9,000. Dollar limit much higher.

As of 12/31/07 the participant is also at her NRA.

The plan provides under its fresh start rules that if frozen benefit is limited by 415 it shall increase after such date in accord with increases in 415 limit.

Plan also provides that late ret benefit is calculated each year as greater of actuarial increase benefit from prior yr and actual AB.

So, as of 12/31/08:

The actuarial increased ben would be greater than 9,000 and 415 comp limit is 9,000.

So what is AB at 12/31/08? I presume 9,000 (or should 9,000 be increased for 415 increase?). If benefit was already 9,000 as of 12/31/2007 then would max benefit be increased for cost of living increase under 415 (i.e. 9,000 *185,000/180,000)?

Now for 12/31/2009:

Say benefit is 9,000 as of 12/31/2008.

Could we increase 415 limit of 9,000 benefit by COLA (195,000/185,000) and compare to actuarial increased benefit and use lesser of the two? Or is AB still 9,000?

Of course benefit would not increase after 2009 since there have been no increases to 415 dollar limits.

Any thoughts?

thanks.

[JAY21]

I think the Accrued Benefit gets adjusted for post-NRA adj. to $9,000 (only) unless they actually elect to take the benefit as an annuity, and then if the plan provides for it, they then could get the COLA increase on the 415 limit-$9,000 even though they are at the High-3 average. If they end up taking a lump sum distribution instead of an annuity stream then I think you're limited to the 9k only for purposes of present valuing the benefit for lump sum purposes.

[Lou S.]

I think the Accrued Benefit gets adjusted for post-NRA adj. to $9,000 (only) unless they actually elect to take the benefit as an annuity, and then if the plan provides for it, they then could get the COLA increase on the 415 limit-$9,000 even though they are at the High-3 average. If they end up taking a lump sum distribution instead of an annuity stream then I think you're limited to the 9k only for purposes of present valuing the benefit for lump sum purposes.

I would agree.

The actuarial increase can't exceed the 100% of pay limit even if it is under the dollar limit.

[SoCalActuary]

I think the Accrued Benefit gets adjusted for post-NRA adj. to $9,000 (only) unless they actually elect to take the benefit as an annuity, and then if the plan provides for it, they then could get the COLA increase on the 415 limit-$9,000 even though they are at the High-3 average. If they end up taking a lump sum distribution instead of an annuity stream then I think you're limited to the 9k only for purposes of present valuing the benefit for lump sum purposes.

I would agree.

The actuarial increase can't exceed the 100% of pay limit even if it is under the dollar limit.

And you should also be distributing a suspension of benefits notice.

[Gary]

thanks, makes sense.

So the 415 limit can be increased if paid as an annuity.

[Gary]

One last practice pointer:

Does it seem reasonable for a plan to freeze accruals, or better yet define future accruals as 0% of a plan year's compensation for a benefit that is earned annually and:

enable participant to continue to earn years of participation/service for 415 purposes?

thanks.

[SoCalActuary]

One last practice pointer:

Does it seem reasonable for a plan to freeze accruals, or better yet define future accruals as 0% of a plan year's compensation for a benefit that is earned annually and:

enable participant to continue to earn years of participation/service for 415 purposes?

thanks.

That is form over substance in legal terms.

You might get away with it, but a good IRS agent would not allow this on audit.