Grandfathered benefit

[JBones]

I'm drawing a blank here on how to grandfather a particular accrued benefit on a takeover. The actual formula is pretty complicated (and poorly written), so these are just hypothetical numbers, but they should illustrate the point:

Initial formula 3% of high 3 times years of service

The formula was amended after this participant had 10 years of service (30% accrual) to 2% of high 3 times years of service. There is no fresh start.

Participant terminates at 14 total years of service (28% accrual under new formula).

28% of average pay at the participant's termination exceeds 30% of the participant's average pay at the amendment date.

What is the ultimate benefit?

a) 28% of high 3 at termination or

b) 30% of high 3 at termination

In other words, was the actual accrued benefit grandfathered or was the accrual percentage grandfathered (and applies to new high 3 prospectively)?

[Andy the Actuary]

Haven't seen the plan but commonly the participant would get the great of 30% FS (at amendment) versus 28% FS (at termination). I.e., this is a wear-away formula with the accrued benefit grandfathered. To advise appropriately, you'd need to provide the plan language.

[JBones]

Thanks Andy. That's what I thought, but it seems like the prior administrator (not the adminstrator at the time of the amendment) continued to apply the old frozen formula to each new high 3 comp. The amendment occured during the GUST restatement and the document is marked "n/a" in the sections that discuss wear-away, so that is no help and the benefit formula itself is defined in the plan as - prior to 2004, X% times high 3 times YOS, after 2003, Y% times high 3 times YOS.

It only makes a $5 difference on a $550 monthly benefit in this case, but I always question myself when I see someone else doing something differently.

[david rigby]

Andy is correct: most application of "grandfathering" (at least what is contemplated under 411d6 protection) is based on a wearaway of the dollar amount determined at the amendment date. Most, but not all, so a careful review of the actual amendment is needed.

However, you may have indentified a different problem: failure to follow the plan document as amended. This may create other issues to address:

- exactly what was the actual application?

- was it consistent (wrong, but consistent)?

- how many EEs affected?

- to what $ extent?

- if application was wrong, who has to 'fess up?

- who has to pay up (if anyone)?

Based on your comments, it may be that no participant suffered any harm, but the plan may have paid more than required by the amendment. The PA should probably engage an experienced ERISA attorney, especially w/r/t the last two bullets.