Suspension of Benefits Notice Not Provided

[Guest jpadavic]

SOB Notices have not been provided for participants in the plan I'm reviewing. However, the plan doc states that for those employed after their NRD (age 65), either thru continuing service or being rehired, they get the greater of the following benefits:

1) - AE of AB at NRD

2) - AB at any previous termination on or after NRD

3) - AB based on service and pay at actual retirement

I have a couple of questions:

A - Does the inclusion of 1) above preclude the need for a SOB notice?

B - If the answer to A is yes, is it still good practice to issue the SOB Notice just to clarify that the pension cannot commence until after retirement?

C - If the answer to A is no, do I have to incorporate any additional comparison in my calculation of benefits at retirement? I have seen reference in various places of different calculations, such as:

I - a ratcheted/ladder calculation where a benefit is calculated at the end of each year prior to retirement, and the AB at EOY is compared to the AE of the AB at the end of the prior year, with the greater 1 moving forward.

II - actuarially increased age 65 benefit + post 65 accruals

III - actuarially increased age 65 offset by post 65 accruals.

My thinking is that this client is OK in that it provides for the comparison of benefits in the plan provisions, but that they still may want to start issuing SOB notices.

I welcome any thoughts...

[Effen]

A - I would say Yes, assuming you interpret AB at NRD to also include the AB at any point thereafter.

B - I would also agree that it can't hurt, assuming it is true. You should check the document to be sure it is true.

In other words, you would need to look at the AE of the AB at NRD, as well as the AB at all points thereafter. Typically, if the AE applies, it would be the ben at NRD that is the greatest, but it is possible the the AB at a later date, when rolled up to the benefit commencement date would actually produce a larger benefit. If you don't pay that larger benefit, then I think you would have needed the suspension notice.

[AndyH]

I thought that your "I" was required up to age 70 1/2 at which time you then need to provide both the actuarial increase to the prior benefit plus the formula accrual.

(Same comment as Effen on the late increase I believe).

[Guest jpadavic]

Thanks for replies.

Why should I interpret AB at NRD to mean AB at any point after NRD as well?

Let's take an example of an ee retiring at age 68 on 7/1/2012. Based on the Plan doc, I would expect that I calculate the age 65 benefit, actuarially increase it to 68, and compare to the AB at 68.

Effen, I think you're saying calculate a benefit at 65 (7/1/09), and other times (not sure how you define any point after NRD) such as 12/31/09, 12/31/2010 and 12/31/2011, and individually actuarially increasing each of them to age 68. This multi age calculation is not taking place, and I'm not sure why it would be required. Is it because no SOB notices have been issued? Does the answer change if they commence issuing them?

As for the MRD situation, the plan provides that MRDs commence at the 4/1 after 70 1/2 (RBD) for all ees whether retired or not. so for that situation, I am comparing the AE of the AB at NRD to the AB based on age and service at the RBD.

[Effen]

I agree with AndyH that post 70.5 need to grant both AE and Age/Service - Suspension Notice has no impact post 70.5

I think you're saying calculate a benefit at 65 (7/1/09), and other times (not sure how you define any point after NRD) such as 12/31/09, 12/31/2010 and 12/31/2011, and individually actuarially increasing each of them to age 68.

Yes, that is what I am saying you "should" do, otherwise you might need a SOB notice as you might be decreasing the Acc Ben.

This multi age calculation is not taking place, and I'm not sure why it would be required. Is it because no SOB notices have been issued?

Well, I never really thought about it, but I guess IF you issued a SOB notice you could get away with only looking at the AB at NRD. However, if you don't issue a SOB notice, then I think you must look at every point after NRD to make sure the AE of that AB, at LRD isn't greater than the AE of the NRD AB at LRD.

In other words, you can't just look at it at NRD and LRD. You need to check the AB at all points in time in between. From a practical matter, for a longer service person, with modest accruals, the AE of the NRD AB will most likely be the greatest, however, if they have a large accrual in one year due to a high pay or a benefit increase, you could find the AE of an AB from a later date is higher.

[Hojo]

I agree with AndyH that post 70.5 need to grant both AE and Age/Service - Suspension Notice has no impact post 70.5

I think you're saying calculate a benefit at 65 (7/1/09), and other times (not sure how you define any point after NRD) such as 12/31/09, 12/31/2010 and 12/31/2011, and individually actuarially increasing each of them to age 68.

Yes, that is what I am saying you "should" do, otherwise you might need a SOB notice as you might be decreasing the Acc Ben.

This multi age calculation is not taking place, and I'm not sure why it would be required. Is it because no SOB notices have been issued?

Well, I never really thought about it, but I guess IF you issued a SOB notice you could get away with only looking at the AB at NRD. However, if you don't issue a SOB notice, then I think you must look at every point after NRD to make sure the AE of that AB, at LRD isn't greater than the AE of the NRD AB at LRD.

In other words, you can't just look at it at NRD and LRD. You need to check the AB at all points in time in between. From a practical matter, for a longer service person, with modest accruals, the AE of the NRD AB will most likely be the greatest, however, if they have a large accrual in one year due to a high pay or a benefit increase, you could find the AE of an AB from a later date is higher.

I agree with Effen here. That is how I was always taught to calculate the AE of the NRD benefit for all calculations. It doesn't generally happen that an accrual is greater than the AE one year and not the next or vice versa, but it definitely can happen and have seen it on a few occassions.

[Guest jpadavic]

Thank you all for your feedback. Very helpful. I have used the ratcheted/annual rollup and comparison of benefits previously on other clients, but I was thinking because the SOB and MRD sections of the plan doc mentioned the AE of AB at NRD, but no other AB between NRD and BCD/MRD, that I just had to compare the AE of the NRD benefit to the AB at ultimate termination or 70.5.

Last questions/points...

It does appear from the examples I've seen that the AE increase is greater than the accrual, so that ultimately, the AE of AB as of NRD will win out over 1) the AE of AB at any other date and 2) the AB at BCD or RBD. However, I understand your point that I really must calculate the AB at each year end roll it up with AE annually to compare to the next years AB. I shouldn't ignore years between NRD and BCD/RBD.

Now my questions have to do with comments on RMDs. Let's assume that ultimately at the 4/1 after 70.5 (RBD), the RMD equals the AB at NRD ratcheted up with AE annually from 65 to the Ps age at RBD. (ie AB at 65 * N(12)65 / N(12)Age at RBD) For the initial RMD, I think we're good with this number, and that I don't have to add any accruals earned from say 12/31 prior to RBD to the RBD, correct?

For future years however where the P keeps working, are you saying that I further actuarially increase the initial RMD by AE AND add the 'regular' benefit accrual earned from 12/31 prior to RMD to the following 12/31? Or do I just do the comparison like all other prior years?

Thanks again for your assistance. I greatly appreciate it.

[Effen]

I think we are on the same page, but I am not 100% sure.

The AE represents the value of the benefit NOT paid. Therefore, if in your example the participant is actually receiving RMDs, then no AE is required since he is receiving the payments, however, you would need to increase the AB each year for additional age/service/compensation changes.

If the person is working beyond the 4/1 following 70.5, and NOT receiving RMDs, then the AB increases for both age/service/comp and the AE of the prior AB. The theory is that since the prior law required RMDs at 70.5, you can't take that benefit away from the participant and therefore you must apply the AE if you delay payment. Also, age/service/comp increases are always required and therefore post 70.5 you must grant both.

It should also be noted that the IRS has also stated that if a plan document is silent about post NRD benefits, then the plan must grant both AE and age/service/comp. The only time when the greater of the two can be paid is when the document explicitly states it.

[SoCalActuary]

I think we are on the same page, but I am not 100% sure.

The AE represents the value of the benefit NOT paid. Therefore, if in your example the participant is actually receiving RMDs, then no AE is required since he is receiving the payments, however, you would need to increase the AB each year for additional age/service/compensation changes.

If the person is working beyond the 4/1 following 70.5, and NOT receiving RMDs, then the AB increases for both age/service/comp and the AE of the prior AB. The theory is that since the prior law required RMDs at 70.5, you can't take that benefit away from the participant and therefore you must apply the AE if you delay payment. Also, age/service/comp increases are always required and therefore post 70.5 you must grant both.

It should also be noted that the IRS has also stated that if a plan document is silent about post NRD benefits, then the plan must grant both AE and age/service/comp. The only time when the greater of the two can be paid is when the document explicitly states it.

"Always required" ???? or just if they increase the benefit above the AE of prior benefits earned. Not "always" in most documents.

[AndyH]

It should also be noted that the IRS has also stated that if a plan document is silent about post NRD benefits, then the plan must grant both AE and age/service/comp. The only time when the greater of the two can be paid is when the document explicitly states it.

Effen, could you elaborate please? I have not heard of this before.

[Effen]

"Always required" ???? or just if they increase the benefit above the AE of prior benefits earned. Not "always" in most documents.

I think we are saying the same thing. The SOB notice only suspends the actuarial rollup, it does not suspend the age/service/comp increase. So, if the AE of the prior benefit is greater, than you are ok - assuming your document says you can pay the greater of the two.

Effen, could you elaborate please? I have not heard of this before.

All hail the Almighty Grey Book - 2009 - Q/A 39

Question 39

Other DB Plan Issues: Post NRD Actuarial Increase Not Stated in Plan

Defined Benefit Plan A provides for additional accruals under the plan’s benefit formula for service after

attaining normal retirement age. The plan does not contain a suspension of benefits rule. While normally

a plan must be operated in accordance with its terms, the plan administrator needs to consider and abide

by ERISA requirements in general. To comply with ERISA, the plan administrator administers the plan by

providing retirees post normal retirement with the greatest of:

• The benefit with additional accruals

• The actuarial equivalent of the benefit at normal retirement

• The actuarial equivalent of the formula accrued benefit at the beginning of each subsequent plan

anniversary date (see 2000 Gray Book, item 34.)

Is this acceptable?

RESPONSE

No. To take advantage of the offset inherent in providing the greater of the accruals or the year-by-year

actuarial increases on previously accrued benefits the plan has to specifically provide for this. Where the

plan does not so provide, ERISA would require that the plan provide both the actuarial increase and the

additional accruals. In light of the Supreme Court’s Heinz decision, a suspension of benefits rule could be

added to the plan for future accruals to avoid the need for the actuarial increases, but it would not apply to accrual earned before the adoption of the amendment.

[AndyH]

Thanks for the memory jar.

[Guest jpadavic]

Thanks again for the commentary. Very helpful.

I saw this example as well... I'd like to make sure I understand this issue, as another plan I'm working on only references continued accruals after NRD, no AE of prior ABs. Here's a simple example.

AB at EOY of NRD = $400

AB at EOY 1 yr after NRD = $450

AE of AB at EOY of NRD = $470

Does this answer to Question 39 mean the benefit at EOY 1 yr after NRD is $520? (ie = $470 + ($450 - $400)). Not considering that the plan has to provide both the AE and the accrual per the Question, I would have expected that the benefit at that time would have been max ($450, $470).

Thanks

[Effen]

I think that is the concept, but I am a little confused by the terminology. Lets say NRD is 1/1/12, I assume you mean:

AB at 1/1/12 (NRD) = $400

AB at 1/1/2013 = $450

AE of 1/1/12 AB at 1/1/13 = $470

If so, than you have the right idea.

That said, just because it is in the grey book doesn't make it law. Often the IRS uses the grey book to raise a point about something they see in the field, but don't like. People have been using the "best of both" for years without worrying if the document explicitly expressed it. I think now people need to be aware this is a potential problem so they can fix their documents going forward. (Obviously, just my opinion.) In many ways these are legal questions that the actuary should stay out of, especially if it is grey area (no pun intended). Let the lawyer tell you how to interpret the document they wrote. If it is a prototype, call the provider and ask them.