Retro disability AFTAP < 60

[Effen]

I have a plan with AFTAP < 60%. Benefits and lump sums fully frozen.

The plan has a disability provision that calls for 100% of the accrued benefit payable as of the date of disability. The plan uses Social Security as the ruling factor. As you may know Social Security often takes more than a year to rule on disabilities.

A participant just received a SS disability award retroactive to October 2010. Normally, the plan would retro disability payments back to October 2010. However, due to the AFTAP, is that permitted?

Seems to me that I can probably only retro back to 1/1/11 without violating the benefit restrictions. Agree?

If you agree, I guess the plan would just have a "payable" for the other 3 payments until the AFTAP is > 60%?

Comments?

[Andy the Actuary]

Went through the retroactive start date issue on a plan where the 50% restriction was in order. The benefits attorney opined that only 50% of the retroactive payments could be distributed in a lump sum since they constituted a lump sum. (You should have seen the election package!!!) In the described situation, the implication is you couldn't distribute retroactive payments in a lump sum.

It's not clear that all attorneys would see it the same way but I relied on the advice of the attorney my client was paying.

[Effen]

1.436-1(d)(3)(iii)(B)Portion of benefit being paid in a prohibited payment.—

If a benefit is being paid in an optional form for which any of the payments is greater than the amount payable under a straight life annuity to the participant or beneficiary (plus any social security supplements described in the last sentence of section 411(a)(9) payable to the participant or beneficiary) with the same annuity starting date, then the portion of the benefit that is being paid in a prohibited payment is the excess of each payment over the smallest payment during the participant's lifetime under the optional form of benefit (treating a period after the annuity starting date and during the participant's lifetime in which no payments are made as a payment of zero).

1.401(a)-20 Disability auxiliary benefit— (1) General rule. The annuity starting date for a disability benefit is the first day of the first period for which the benefit becomes payable unless the disability benefit is an auxiliary benefit. The payment of any auxiliary disability benefits is disregarded in determining the annuity starting date. A disability benefit is an auxiliary benefit if upon attainment of early or normal retirement age, a participant receives a benefit that satisfies the accrual and vesting rules of section 411 without taking into account the disability benefit payments up to that date.

Example. (i) Assume that participant A at age 45 is entitled to a vested accrued benefit of $100 per month commencing at age 65 in the form of a joint and survivor annuity under Plan X. If prior to age 65 A receives a disability benefit under Plan X and the payment of such benefit does not reduce the amount of A's retirement benefit of $100 per month commencing at age 65, any disability benefit payments made to A between ages 45 and 65 are auxiliary benefits. Thus, A's annuity starting date does not occur until A attains age 65. A's surviving spouse B would be entitled to receive a QPSA if A died before age 65. B would be entitled to receive the survivor portion of a QJSA (unless waived) if A died after age 65. The QPSA payable to B upon A's death prior to age 65 would be computed by reference to the QJSA that would have been payable to A and B had A survived to age 65.

After re-reading this, it doesn't appear that I can retro any payments, although I am wondering if I can argue the "annuity starting date" has not yet occured because this disability benefit is an auxiliary benefit?

[Effen]

FWIW, after consulting with the plan's attorney as well as several other actuaries and IRS types, we decided that it was ok to make the retroactive payments because the disabilty benefit is fully subsidized and the participant has not reached their Annuity Starting Date. The retroactive payments are corrective.