Actuarial increase after Normal Retirement Age

[Guest ERISAphile]

Participant has been told that there will be no actuarial increase if he delays taking his defined benefit pension after NRA (age 65). Participant was fully vested (5 years of service) when he terminated employment at age 57. Early retirement under Plan is age 55 and 5 years of service; participant is age 62 and has not yet taken his pension. Participant was told that there is no actuarial adjustment if he commences pension later than NRA age 65 -- e.g. if he decides to defer until age 66 or later (but not after 70 1/2). Is it permissible for Plan to avoid giving actuarial increase if he delays taking pension -- if so, is it because the Plan "forces" payment at NRA age 65 and doesn't allow deferral beyond age 65 to 70 1/12?

[Andy the Actuary]

For an active employee, Plan may stipulate no actuarial increase if Plan Administrator provides appropriate notification to affected employee. In short, the employee trades lost pension for salary. "Appropriate" goes well beyond just telling employee -- there are specifics that the "notice of suspension" must contain. If Plan fails to give "appropriate" notice, then remedy appears to be to give the actuarial increase.

For a former employee, there can be no suspension and unless Plan provides for retroactive annuity start date, actuarial increase would apply. In this case, there is no salary trade-off.

Suspect you will find agreement with the stated treatment for actives and disagreement with the stated treatment for former employees.

[Guest ERISAphile]

For an active employee, Plan may stipulate no actuarial increase if Plan Administrator provides appropriate notification to affected employee. In short, the employee trades lost pension for salary. "Appropriate" goes well beyond just telling employee -- there are specifics that the "notice of suspension" must contain. If Plan fails to give "appropriate" notice, then remedy appears to be to give the actuarial increase.

For a former employee, there can be no suspension and unless Plan provides for retroactive annuity start date, actuarial increase would apply. In this case, there is no salary trade-off.

Suspect you will find agreement with the stated treatment for actives and disagreement with the stated treatment for former employees.

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You state that for a former employee there can be no suspension unless the Plan provides for "retroactive annuity start date" -- what do you mean by that? If pariticipant had an accrued vested accrued benefit of $500 at NRA when he terminated employment at age 57, and will be paid the $500 benefit if he starts taking the benefit at age 65 NRA (or at age 66 or later, up to 70 1/2), is that a provision for "retroactive annuity start date"? What would a provision for retroactive annuity start date look like and how would it affect this participant's $500 vested accrued benefit payable at age 65?

[Guest ERISAphile]

You state that for a former employee there can be no suspension unless the Plan provides for "retroactive annuity start date" -- what do you mean by that? If pariticipant had an accrued vested accrued benefit of $500 at NRA when he terminated employment at age 57, and will be paid the $500 benefit if he starts taking the benefit at age 65 NRA (or at age 66 or later, up to 70 1/2), is that a provision for "retroactive annuity start date"? What would a provision for retroactive annuity start date look like and how would it affect this participant's $500 vested accrued benefit payable at age 65?

[AndyH]

For a former employee, there can be no suspension and unless Plan provides for retroactive annuity start date, actuarial increase would apply. In this case, there is no salary trade-off.

I see this a lot with takeover plans - no actuarial increase for vested terms., and no RASD. How does one suspend a vested term? I don't doubt that there is a requirement to provide an actuarial increase, it is just not in these documents and I don't know why. And I see it often with lawyer-written documents.

Comments?

[Andy the Actuary]

For a former employee, there can be no suspension and unless Plan provides for retroactive annuity start date, actuarial increase would apply. In this case, there is no salary trade-off.

I see this a lot with takeover plans - no actuarial increase for vested terms., and no RASD. How does one suspend a vested term? I don't doubt that there is a requirement to provide an actuarial increase, it is just not in these documents and I don't know why. And I see it often with lawyer-written documents.

Comments?

Generally, plans are drafted by folk who have never even performed a benefit calculation. The post-65 vested term case is not addressed because after all, administration is always right on top. On several take overs, I've worked with attorney's to add RASD or at least to include language that supports giving an actuarial increase. In the end, you've got to act in favor of the participant where the plan is silent.

[Andy the Actuary]

How do these plans get favorable determination letters?

Before or after the amendment? Hey, you don't need to answer. My answer will be the same: I dunno.

[John Feldt ERPA CPC QPA]

Are you saying that the RASD requirement would only have to apply to vested terminees who do not start their payments at NRA (if proper susupension of benefits notices are given to actives)?

If the plan gives proper and timely suspension of benefits notices to all participants who do not start their payments at NRA, the plan must still allow a vested terminee who delays past NRA to start their pension retroactively to NRA once they provide their distribution election - if the plan has RASD language - correct? Absent such RASD language, the plan would be required to actuarially increase such benefits for these vested terminees - correct?

[Andy the Actuary]

Are you saying that the RASD requirement would only have to apply to vested terminees who do not start their payments at NRA (if proper susupension of benefits notices are given to actives)? Sounds reasonable

If the plan gives proper and timely suspension of benefits notices to all participants who do not start their payments at NRA, the plan must still allow a vested terminee who delays past NRA to start their pension retroactively to NRA once they provide their distribution election - if the plan has RASD language - correct? Absent such RASD language, the plan would be required to actuarially increase such benefits for these vested terminees - correct?Your approach sounds reasonable

It sounds as if I'm not sure but I agree with your approaches and would be how I would treat the situations. However, I'm not up on the particular legalese cannot give you the "correct" answer you're seeking.