Does this post-age-65 accrual formula seem legal to you?

[Gary]

A plan provides the following for post 65 accruals. Age 65 benefit is to be converted to a lump sum, then increased with interest to actual ret. and then converted to a equiv ben @ actual ret. The first question is, this actuarial increase doesn't seem to comply w/ regs. The regs seem to instruct us to compare the act equiv w/ the actual accrual after every plan year and then at actual ret. Any thoughts? Anyway, trying to interpret the plan, I have the following questions. If age 65 lump sum is accum w. interest to actual ret, s/ it be accumulated w/ the lump sum interest set forth in plan or act equiv. for all other benefits? And lastly, when the benefit is converted @ actual ret to an equiv annuity, (it doesn't specify) s/ benefit be converted using lump sum rates or act equiv rates for plan benefits other than lump sums?

[richard]

You are right, the post-NRA accruals in the plan do not comply with the regs. (Your description of the regs is accurate.)

So, you might consider calculating the benefit based on what should be in the plan. This is because you have to reflect ERISA-required provisions for minimum funding even if it isn't in the document. (By the way, a simple solution is for the plan to be amended to comply with the regs, but that would be too easy.)

Now, to calculate the benefit based on the plan as stated:

For adding interest to the age 65 lump sum, look at the wording in the plan. See if there is a reference to how to calculate interest. Alternatively, you might use the interest rate in the definition of actuarial equivalence (where there is an interest rate), and take the position that adding interest to the age 65 lump sum is calculating the actuarially equivalent benefit.

(You could argue against using the lump sum interest rate since that rate as defined in the plan is used to convert a monthly pension to a lump sum.)

Now as far as converting the lump sum to the equivalent annuity, again look at the wording in the plan document. This is a bit trickier because "actuarially equivalent" is probably defined as some interest rate/mortality combination EXCEPT for converting monthly benefits into lump sums. Here, converting a lump sum into a monthly annuity is sufficiently close to warrant using the lump sum factors.

(As you can tell, I like this situation as much as you do. Yuck!)

[david rigby]

sorry to be so uninformed, can you help me identify which regs are relevant here? DOL? IRS?

thanks.

[Gary]

They can be found in the 411 IRS proposed regs (I think, off the top of my head)

[Guest Brian4]

The proposed Treasury regulations were dated April 11, 1988. The proposal was to amend three Treasury regulations. Most of the changes were to 1.411(a)-1. Also see IRS Notice 88-126 regarding any pre-1988 service.