Suspension notice failure

[Guest Philip2]

Plan provided for suspension but did not give out suspension notices to persons who worked past NRA. Plan provides that at late retirement, retiree receives benefit accrued through late retirement date. Because the plan assumed suspension notices would be given (and so there would be no actuarial increase), document does not provide that retiree gets the greater of (i) accrued to late retirement or (ii) actuarial increase.

We are now trying to correct the failure. Because the plan does not provide for the "greater of" at late reitrement, do we need to give both the accrued to late benefit and the actuarial increase?

[John Feldt ERPA CPC QPA]

Generally yes, you must give the greater of the continued accrual with the additional service/wages as they apply, or if greater, the actuarial increase of the prior accrued benefit.

Is it worthwhile to try EPCRS and see if the IRS might allow you to give the notice now (late)? They might or might not agree to that depending on the facts of the situation, but maybe that could get you out of some or all of that extra accrual?

[Guest Philip2]

Thanks, but our question is whether we have to give both the additional accruals and the actuarial increase if the document does not specifically provide for "the greater of."

For various reasons not relevant here, EPCRS is not an option.

[John Feldt ERPA CPC QPA]

Where the document does not specify, you must still comply with applicable law. The regulations interpret the law, and I think the regulations require the actuarial increase if the notice is not provided, but you may wish to seek a legal opinion in the matter.

[Effen]

I believe there was a Gray Book Q/A a few years ago that said, if the document was silent, you needed to give both. They only way you are permitted to give the greater of the two is if your document contains specific language permitting it. Otherwise, they should get both.

[Andy the Actuary]

This is a draconian result but here's the 2009 Gray Book Effen referred to. Note, the attorney's I've worked with argue the Plan should give the greater of the NRB actuarially increased or the benefit accruals if the Plan fails to give the suspension notice. Not being an attorney, I was unaware of the implied requirement that the Plan must contain the suspension of benefit provisions. In the circumstances below, it is unclear whether the IRS answer would agrue their position applies even if the Plan provided the suspension notice in a timely way since the procedure was not stated in the Plan document.

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
accruals earned before the adoption of the amendment

[Guest Philip2]

Andy and Effen--thanks so much!