Fractional Accrual Method - Break-In-Service

[Andy the Actuary]

IRS Rev. Rule 81-11 describes two methods for applying the fractional accrual method when less than a full-year of service has been credited in an accrual period. The Rev. Rule does not specify a default method. Two acceptable methods were outlined. A plan does not specify a method and the case has arisen whereby the participant left after accruing 20/40 benefit, did not receive a distribution, was rehired 10 years later, and then terminated 5 years later.

Under Method I, we have 20/40 + (1-20/40) x 5/10 = .75

Under Method II, we have (20 + 5) / (20 + 10) = .8333

The Plan does not address the situation. I.e., it does not specify Method I or Method II.

Question: (1) May the Plan now specify Method I without a 411(d)(6) violation?

(2) May the Plan Sponsor adopt Method I (say in its Retirement Committee meeting minutes)?

[SoCalActuary]

It is entirely controlled by your document language.

Unless your document specifically describes Method I, you will use Method II.

And if your read the plain language on benefit accrual in most plan documents, Method II is what you would get.

Sure, that give a jump in the accrued benefit on the first year back, but that is the default way for documents to be written.

[Andy the Actuary]

It is entirely controlled by your document language.

Unless your document specifically describes Method I, you will use Method II.

And if your read the plain language on benefit accrual in most plan documents, Method II is what you would get.

Sure, that give a jump in the accrued benefit on the first year back, but that is the default way for documents to be written.

Yes, obviously I felt the same because of the way I posted. Method 1 is impossible to explain to the layperson and very likely -- unless codified in the plan document -- would not be applied consistently. Thanks for your thoughts.