Short Plan Year (Wear-Away Option)

[Andy the Actuary]

A DB plan amendment will be adopted during 2011 to change a July 1 - June 30 plan year to the calendar year effective 1/1/2012 so that there will be a short plan year from July 1, 2011 - December 31, 2011. The benefit formula is 1% of FAS x YOS, where FAS is determined on a July 1 - June 30 basis. As of 12/31/2011, the accrued benefits for all actives will be calculated. Effective 1/1/2012, a participant will accrue benefits under the same formula but using FAS determined using historical calendar year compensation. If greater, the 12/31/2011 grandfather applies.

As of 1/1/2012, the AFTAP is calculated to be 80% before applying the amendment (i.e., just with the grandfather). After applying the Amendment, the AFTAP is 78%. Can this amendment take place without the Plan Sponsor making additional contributions to increase the AFTAP to 80% after the amendment ??? If not and the employer does make a contribution, does this mean the plan year has not changed or that the plan year has changed, but the part of the amendment that changes the computation compensation period does not take effect?

My opinion is the Plan Amendment consists of two separable provisions -- the change in plan year and the change in compensation compensation period. There should be no problem changing the plan year. However, it seems that the change in compensation period, while it does not alter the benefit calculation formula per se, does in operation increase benefits and so would be precluded from going into effect.

Comments ?

[Effen]

I think I would argue that the amendment can take effect because it doesn't really change the benefit formula. I guess you could end up with different result for a mid-year calculation, but I don't think you have really changed anything from a practical sense.

What average comp will you use in the 12/31/11 ben calc? Will they get partial credit for the 7/1/2011-12/31/11 plan year?

[Andy the Actuary]

I think I would argue that the amendment can take effect because it doesn't really change the benefit formula. I guess you could end up with different result for a mid-year calculation, but I don't think you have really changed anything from a practical sense.

What average comp will you use in the 12/31/11 ben calc? Will they get partial credit for the 7/1/2011-12/31/11 plan year?

The Plan uses the 1,000 hours rule, so anyone with 1,000 hours gets a year of benefit service and any with less than 1,000 hours get a partial year. It will also credit a year of vesting if 1,000 hours performed during the annual period ending 6/30/2012 and 1,000 hours during the annual period ending 12/31/2012. The 12/31/2011 calculation will be performed as if the Plan Year was not changing, save service crediting. Thus, since the Plan uses Plan Year compensation, the short Plan Year compensation will likely not increase the the calculation of FAS.

I pondered your interpretation but 430 regs. provide, "Under section 436©, a plan amendment that has the effect of increasing the liabilities of the plan by reason of any increase in benefits (including changes in vesting) may not take effect if the plan’s AFTAP for the plan year is less than 80 percent or would be less than 80 percent taking into account the amendment."

Your contention is "by reason of any increase in benefits" means the benefit formula has changed. I questioned where it means and increase created by plan operation. Obviously, an amendment employing a fresh-start date would not decrease the AFTAP.