Who should employee talk to about legality of a DB plan?

[Guest CuriousEmployee]

I'm a recent retiree who questions the fairness of several aspects of my employer's DB plan as applied to my case. I have questions about ADEA in relation to early retirement benefits, SS offsets, and offsets from a pension at another employer (50% subsidiary of the first). Also, questions about conversion of an earlier traditional DB plan to a cash balance plan (I'm sure the company's attorneys looked at it carefully, but I'm still questioning some aspects and want to understand how it complies with IRS rules), and questions about how the cash balance plan meets accrual rules. Plan interpretation of average compensation for employees transferred in from a 50% subsidiary is another area of concern.

I have spend many hours researching the plan, the IRS rules, etc.--enough to know that this is very complex and it would take years to become an expert. I have already filed an appeal (rejected on all counts) with employer. Next step is to consider filing ERISA suit in federal court. I could talk to an attorney, but there are many specialties and I don't want to have someone who doesn't know the details of the rules and calculations for DB plans. Do I need an actuary? Are there attorneys who are also actuaries? Actuaries who work with attorneys? I'm willing to pay for expertise; I don't want to pay a lot of money to someone who has to go learn it themselves.

In short, what kind of professional has the training and knowledge about plan design, pension calculations, and related legal matters--and who works with retail customers (employees)--to look at my case?

I would appreciate any guidance you can give me. Specific firms or names welcome (if allowed on this board).

Thanks in advance!

(I'm assuming it would be an unwelcome intrusion for an employee to ask specific "newbie" questions about DB rules on a board dedicated to benefits professionals, so I'll refrain unless invited).

[Effen]

Yes, you probably should talk with an actuary, and possibly an attorney. There are probably some actuaries who would help you at very little or no cost. Ask around to your professional friends for a recommendation. I think some of the American Academy of Actuaries was talking about creating a network of actuaries who would work with participants, but I don't know if that ever got off the ground.

If you have specific questions you can try posting them here, but as many will tell you, you get what you pay for.

You should also ask your employer for a copy of the plan document and the Summary Plan Description. The plan document will contain the specifics of how the plan is operated.

[masteff]

Have you talked to the DOL? It's worth a phone call even if they end up saying you need to get your own expert. In which case I'd start w/ an actuary and depending on what they say, then talk to an atty who specializes in the ERISA and/or HR law.

I will just warn you... your first sentence mentions "fairness". Nothing in the law requires fairness. It prevents discrimination in favor of the highly compensated, but nothing about being fair.

[Hojo]

I will just warn you... your first sentence mentions "fairness". Nothing in the law requires fairness. It prevents discrimination in favor of the highly compensated, but nothing about being fair.

^This.

If the plan is qualified and passes nondiscrimination testing, then as long as the plan is being administered properly they are not doing anything unfair. Now, whether you believe the background plan design is discriminatory is a matter that could be eventually taken up, but that is an entirely different case.

[david rigby]

Nothing in the law requires fairness. It prevents discrimination in favor of the highly compensated, but nothing about being fair.

To be precise, the law does not prevent discrimination, but places limits on it. Again, this is what pension law thinks of the fairness concept.

[PensionPro]

The Pension Assistance List (PAL) is an American Academy of Actuaries program that serves the public. It is intended to provide professional services to consumers who have questions about their pension plans. When a request is received, the PAL coordinator selects an actuary from the PAL volunteer list who has appropriate expertise. The PAL actuary contacts the consumer and offers up to four hours of free help. Soon after the initial contact, the PAL actuary and the consumer each receive a form from the Academy that solicits feedback. The PAL program has been featured in a number of publications, including AARP's Modern Maturity in 2002 and Contingencies magazine in 1999. Questions? Contact Gabriel Swee at 202-223-8196, the PAL coordinator.

http://www.actuary.org/content/pension-assistance-list-pal

There is also a Find An Actuary quicklink on the same site. I know ASPPA's FSPA and MSPA designations denote pension actuaries, but maybe there are other designations as well.

[Guest CuriousEmployee]

This is all great input. Thanks!

I have contacted both the PAL and also the National Pension Lawyers Network (mentioned in an article about PAL--http://www.actuary.org/files/publications/pal_contingencies99.pdf ). Hopefully that will get me an expert to help cut through the confusion!

I do have my Plan document and SPD as well, and have studied them intently. The questions I have primarily relate to plan design, but some are questions of plan interpretation. On the design side, I want to understand how certain provisions are compliant with certain rules of qualified plans as I, in my relative ignorance, understand them from reading section 411 etc.

[Guest CuriousEmployee]

Since Effen says specific questions are OK, I'll ask about a couple topics.

I keep reading about "Safe harbors" and "Determination Letters". Can someone tell me what the legal standing of these is? I have assumed that a safe harbor provision is one where if you design your plan according to that, you will meet the requirements of the law (at least for that provision). I have assumed that a determination letter is a process where a company submits a plan to the IRS and they issue a determination letter saying it complies with the IRS regulations. Is that correct? Is it safe to assume that a plan for any major Fortune 500 corporation would have a determination letter backing it up? Do plans get a determination letter only when started? Every time there is an amendment? Every year? Every time there is a regulatory change? Does a determination letter have legal standing? (i.e., seems like I ran across a case where the court determined that even though the plan met an IRS rule it was still in violation of the law because the courts interpreted the law differently than the IRS did in making their regulations). Thanks for any light you can shed on safe harbors and determination letters.

Also, is my plan a cash balance plan, a hybrid plan, or something else? My plan includes a benefit formula (current formula) that is based on the the sum of various basic accruals (expressed as percentages) and supplemental annual accruals (expressed as percentages; related to social security wage base). These sums have career caps of 425% and 120%, respectively, meaning that late in career you no longer accrue more percentages. The total percentage is multipled by your average annual compensation (over 3 years) and then converted to an annual payment using a benefit conversion factor which I assume is an actuarial factor plus perhaps an early retirement factor? (it is 11.4 for Age 50, 10.8 for Age 55, and 9.2 for Age 65). It also has a grandfathered formula for older workers based on 1.6% of average compensation times years of service (not in excess of 35 years) and 0.8% (for >35 years), and a basic offset factor (related to Social Security). The benefit is the greater of the grandfathered formula or the current formula.

Thanks for any help!

Thanks.

[John Feldt ERPA CPC QPA]

Sounds perhaps like it's a pension equity plan.

[Guest CuriousEmployee]

Thanks, John. I believe you are correct. Pension equity plans as described here sound like what I have: http://www.bls.gov/opub/cwc/cm20031016ar01p1.htm

[John Feldt ERPA CPC QPA]

As to your questions, I am not aware of any "safe harbor" formula that automatically satisfies nondiscrimination in a pension equity plan. However, I have only worked with a few pension equity plans, but none since PPA of 2006, so I could be wrong about this.

Yes, you are correct that a determination letter can be obtained for a qualified plan when a company submits the plan to the IRS. After the IRS reviews the document (and maybe after some negotiated language changes), the IRS generally issues an opinion saying the written language of the plan satisfies the requirements of the applicable IRS cumulative list.

Getting a determination letter from the IRS is voluntary, so not all plans have one. However, I think of a D letter as clothing. It's not required for a plan to have an IRS opinion letter, advisory letter, or determination letter - BUT, I think of the plan as being naked without one of those, allowing the IRS to see everything, giving them the option to challenge any text in the document if they choose to audit the plan.

So, it seems likely that most Fortune 500 corporations would have a determination letter for each of their qualified plans, but since it is not required, some might not.

Firms could apply for an opinion regarding each amendment, but I think this is rare. Instead, the IRS has a remedial amendment period that allows a plan to be "fixed" when it applies for its determination letter, even if the fix is retroactive in nature (although some limitations may apply).

For individually design plans (those that are not pre-approved), like pension equity plans, cash balance plans, ESOPs, governmental 401(a) plans, etc. the remedial amendment period is a 5-year cycle based on the EIN of the sponsor or based on the type of plan sponsor as described Rev Proc 2007-44. This five-year cycle was designed to ease the IRS burden of having large spike in applications all at one time, so most individually designed plans now submit for a D Letter application once every five years with the deadline being based on the last digit of the plan sponsor's EIN.

A determination letter has some importance, other than the audit protection that it provides. In certain individual bankruptcy issues, assets in a plan covered by a determination letter have protection from creditors. Also, if the plan has a significant operational error that needs to be fixed, the plan has to have a Determination Letter as one of the conditions if they want to self-correct the problem. If a participant wants to prove that their rollover is qualfied, a copy of a D letter can sometimes be used as proof.

The determination letter does not protect the plan against plan provisions that violate ERISA, the law (unless the regulations or other guidance has rendered such provision of the law as inapplicable, such as 401(a)(26) for DC plans). But, the D letter does protect the plan's language regarding provisions that might disagree with the interpretation of the law as spelled out in various regulations, However, the IRS does not just hand out these letters, they can and will require plans to remove or amend language that does not meet their standard for meeting the qualified plan requirements under 401(a).

I hope this has helped.

[Guest CuriousEmployee]

Very helpful indeed! Thanks.

So suppose it appears to me that the plan's formula for Accrued Benefit doesn't pass any of tests A,B or C of 411(b)(1), i.e., the 3% rule, 133-1/3% rule, or the fractional rule. That is, when using my personal data and plugging into the plan formula for Accrued Benefit (an Age 65 benefit in this plan), I find that it fails each of these tests. What is the best path forward? I have already exhausted administrative appeals to the plan itself (ERISA appeal). The review board says they review and decide on plan interpretation but not plan design. I assume this would be a plan design issue. How can design issues be challenged/addressed?

One option would seem to be to file suit in federal court. I'm not sure what that gets me in the end, nor what the (perhaps considerable) risk to me might be (with attorney's fees considered). Someone would need to help me further on the benefit accrual alternatives before I'd know the potential payoff, and a legal expert would have to opine on the risks.

Would another option be a whistleblower complaint to IRS charging that the plan is not qualified? I'm assuming that if successful, I would then be entitled to a percentage (10-15%) of the amount recovered by the IRS from the plan. Seems like this could potentially offer a larger reward but with little risk to me. (I'm not even sure a whistleblower charge would fly, if it were determined that it was based on public information. I'm assuming that my personal data plugged into the formula and showing the result to be noncompliant would not be considered public information, but I don't know).

If they had a determination letter, would that protect them from any kind of whistleblower charge?

Any thoughts?

[Hojo]

I'd be very interested to see how this doesn't pass the 3% rule.....

[Guest CuriousEmployee]

I could be doing things wrong. (Still haven't heard back from PAL so haven't sat down with an actuary yet to do the figures). Here is how I was figuring. The law states:

"(A)A defined benefit plan satisfies the requirements of this paragraph if the accrued benefit to which each participant is entitled upon his separation from the service is not less than—

(i)3 percent of the normal retirement benefit to which he would be entitled at the normal retirement age if he commenced participation at the earliest possible entry age under the plan and served continuously until the earlier of age 65 or the normal retirement age specified under the plan, multiplied by

(ii)the number of years (not in excess of 33 1/3) of his participation in the plan."

The ratio in my case is 95.4%.

My employer's plan defines accrued benefit as the greater of (i) or (ii) where (i) is the older traditional pension plan formula used assuming I work to Age 65 and multiplied by the ratio of actual service to service to Age 65, and (ii) is the newer PEP formula. (ii) is the lesser of (A) the projected account balance at Age 65 using average annual compensation and my credited service projected to Age 65, and (B) the actual account balance increased at 8%/year until Age 65.

Because of a cap several years ago on average compensation for the traditional plan (as part of the transition to the new plan, average compensation on the old plan was to be capped 10 years after the start of the PEP), and because the old plan also has a social security reduction factor and a significant early retirement benefit, the Age 65 accrued benefit under the formula is significantly lower at Age 65 than the actual benefit I'd receive under the old plan at my actual retirement age of 52. I calculate about $43k at Age 52 vs. $36k at Age 65. Thus, applying the service ratio in (i), the formula for (i) results in an accrued benefit of about $26k. Under (ii), in my case (A) is less than (B)--about $670k vs. $1206k (before multiplying by the 95.4% factor). After multiplying by 95.4%, that works out to $640k. The plan provides for an annuitization factor of 9.2 at Age 65, so $640k becomes an annual benefit of $69,543. Thus, (ii) is larger than (i) and thus $69,543 is my Age 65 accrued benefit under the plan. Note that this is the PEP based accrued benefit.

The Age 52 PEP benefit is less than the Age 52 benefit under the old plan, though, so the old formula benefit of ~$43k is what I was given when I retired at Age 52. Under the plan, the Age 52 annuitization factor for PEP is 11.1. If I apply that to my Age 65 accrued benefit ($640k) I get $57,640. That is more than the $43k I am receiving. On that basis, I have concluded that they may fail the 3% rule, since I am receiving less than my Age 65 accrued benefit converted into an Age 52 benefit using the plan's actuarial factors (or does the plan's conversion factor comprise more than just an actuarial factor, perhaps including some kind of early retirement subsidy or other subsidy?).

This is probably revealing a significant lack of understanding on my part (I know I need help!). It may be that one can only do the comparison at Age 65, and by that date, the PEP benefit would exceed the benefit under the old plan and that is what I would receive, and that would indeed meet the 3% rule.

I guess a lot hinges on how you interpret "the accrued benefit to which each participant is entitled upon his separation from the service". It is hard for me to understand how I can be entitled to something at separation from service (at Age 52) if that is just a future benefit, not something I can take now. But maybe that is the legal meaning. This is something I'm still trying to understand and haven't found the answers for, but am researching in the federal register as I write. If anyone has some good references for what this phrase means, I would appreciate the links.

Hojo, feel free to blast this to pieces!

(Also, if anyone can, please comment on if it is OK for the old plan's Age 65 benefit to be lower than Age 52 benefit. My employer explained that it is OK since social security and early retirement offsets are to be excluded from consideration when determining if accrued benefit decreases with age).

Thanks!

[Hojo]

There's definitely a lot that you're misunderstanding here...You need to sit down with an actuary to understand how the 3% rule works, how your plan works, how early retirement factors work, what an accrued benefit means.....lots of things. I suggest waiting to talk with the PAL until you proceed with anything.

[Guest CuriousEmployee]

Thanks. Hope I hear from them soon. If you have any links for the above in layman's terms, or further details proffered by yourself, I'd be appreciative.

[Guest CuriousEmployee]

Heard back from PAL. They couldn't locate anyone who could help me.

So...back to my original question, really. How can I find an actuary who can help me? Is there a good way to search for them in my area (Houston)? I need someone who is very knowledgeable about pension plans/law, but who can work with a retail client. I'm assuming most actuaries work for corporations.