Suspension of benefits

[Belgarath]

2 quick questions:

Am I correct that under Heinz, a frozen DB plan that currently has no suspension of benefits provisons cannot be amended to provide for suspension of benefits on those benefits already accrued?

Also, just soliciting opinions - if you were installing a new DB plan, would you normally recommend that they do have a suspension of benefits provision? They can always amend to remove it, so would there be any particular downside?

This is really just a matter of curiosity, so please don't waste your time if this requires a lot of research or time to offer an opinion. Thanks!

[david rigby]

1. <let the attorneys respond. Better yet, let your attorney respond.>

2. IMHO, a suspension provision (assuming you refer to the rehire of a retiree who is receiving a monthly benefit) is a bad idea, whether for an early retiree or a normal retiree. It is very difficult to correctly administer a suspension provision, especially for a plan sponsor with multiple locations.

- Suspension language in the plan can discourage an employee from accepting re-employment, even part-time. If the re-employment was requested by the employer (which does happen), this means the plan is interfering with the Employer’s HR policies.

- If the plan is frozen, a rehire cannot generate additional accruals.

- If the plan uses 1000-hour-rule and the rehired EE works less than 1000 hours, there is no additional service and no change in the benefit. This result makes the most sense to both employees and employers. Obviously, there is no “double-dip”, and suspension of the monthly benefit is undesirable.

- Even an employee rehired part-time might work significant hours in a single month or quarter but never reach 1000 hours in a year. For example, imagine a bank that hires retired tellers during the summer months to fill in for others that go on vacation, and that person might have 500 hours in 3 months, but nothing else during the year. Obviously, there is no “double-dip”, and suspension of the monthly benefit is undesirable.

- If the rehired EE works 1000+ hours, the additional year(s) of service will cause a recalculation of the benefit at subsequent retirement. The increase in benefit, if any, is offset by the value of the benefits already received (at least in most plans). Many rehired retirees work part-time; very few will work full time. Even when there is additional service accrual, the overwhelming majority result in a zero change because the additional year(s) are “less valuable” than the benefits already received.

- If the pay after rehire is significantly more than the pay before retirement, it is possible for the additional year(s) to create a net increase. In this context, “significant” probably means pay at least 25% higher; such higher pay after rehire is extremely rare.

- If the employee is over Normal Retirement Age, the avoidance of a suspension provision is even more important, as it can avoid the cumbersome (and expensive) process of calculating and providing the post-NRA actuarial increase.

In my experience, there are no winners in the administration of suspension language, and the complexity can be significantly cumbersome.

There may be other opinions.

[FAPInJax]

I am not sure about the first question. However, the second question is easier, I would usually have the suspension of benefits option in the plan. It has the potential to avoid the problem that the owner gets to 62 with a 415 benefit and decides to keep working. This is a worst case because the remedy for violation is plan disqualification. Now, a plan where I do not have to worry about 415 then I might consider leaving it out (looking forward to other opinions)

[Andy the Actuary]

IMHO (which is selling at a discount these days), give the actuarial increase. I've yet to have a plan sponsor who can administer this provision even when you tell him who,what, when, where, why and how. They simply fail to send the notices, or internal turnover frustrates the process. To make it work as a third party, you'd have to continually monitor the process, prepare the notice each time, and send it to the client. Then, you'd have to pray the client distributed it timely.

The response to your question all falls under the umbrella of "two actuaries, three opinions."

[Belgarath]

Sounds like a joyous exercise. Thanks for the opinions. One additional question which occurred to me, if I may trouble you further. And I'm venturing into dangerous waters (for me) - would such a provision possibly have the effect of reducing funding requirements somewhat, as in essence it is forfeiting benefits? Again, this is just curiosity - no actual plan involved!

[AndyH]

Sounds like a joyous exercise. Thanks for the opinions. One additional question which occurred to me, if I may trouble you further. And I'm venturing into dangerous waters (for me) - would such a provision possibly have the effect of reducing funding requirements somewhat, as in essence it is forfeiting benefits? Again, this is just curiosity - no actual plan involved!

Sure, over time as benefits are not increased as much as they would have. Not usually material though.

But I second the sentiment that nobody ever (in my experience) administers these things properly. Not worth the aggravation under normal circumstances IMHO.