When to increase monthly benefit?

[shERPA]

A takeover plan is a unit credit accumulation plan formula, where the benefit is the prior year AB plus the current year's accrual based on current year pay times 1.25%. No lump sum option only life and QJSAs. 1,000 hours required to accrue each year.

When participants reach NRA, the plan begins to pay the participant's monthly benefit, even if the participant does not retire.

So if a participant attains NRA in 2013 and begins receiving his monthly benefit, and then accrues an additional benefit in 2014, when does the payment increase?

a. First of month after completing 1,000 hours (except that the amount of the benefit is not yet known because 2014 total wages aren't known);

b. First day of the next plan year?

c. as soon as administratively feasible in the next plan year with a catch up back to when the benefit accrued?

d. Other?

The plan document has no language addressing this, the prior plan documents that we have obtained do not address it either.

Thanks.

[Andy the Actuary]

How has this been treated historically? Hopefully, consistently. Codefy the treatment.

[david rigby]

"...when does the payment increase?"

Never?

[My 2 cents]

"...when does the payment increase?"

Never?

Wouldn't the plan have to recognize the ongoing accruals, even after benefit payments have commenced? Presumably, the plan does not offset new accruals by the actuarial equivalent of benefits already paid (and, even if it did, the question would deal with new amounts earned over and above such an offset, if any).

My vote is (b) or © (to pay the newly earned benefit effective as of the first day of the 2015 plan year, but if not administratively feasible, start paying the increased amount as soon as administratively feasible with a catch up back to the beginning of the 2015 plan year). Nothing would be payable with respect to 2014. Unless explicitly called for by the plan (which has been described as silent), I would not choose (a). I would expect the new accrual to be treated as though accrued on the last day of the 2014 year.

The operating principal here is that the plan can never shut off accruals just because the person has reached NRA or even because the person is receiving benefits while still employed. So you have to have procedures for measuring the increase in accrued benefit (if any) and getting the increase in accruals into pay status with the benefits already being paid.

[shERPA]

That's where we're coming from 2cents.

Historically, they have increased the benefit each month. So for example, if based on anticipated compensation they expect the participant to earn a $36 accrual for the year, they would increase the benefit $3 per month, and then true up the next year based on actual compensation. Clearly administratively burdensome, and doesn't make sense to increase the benefit at all prior to the participant completing 1,000 hours to accrue the benefit. And nothing in the prior documents we've seen supports this.

As part of our takeover we're trying to sort these sorts of issues and then document it. We'd like to not pay any 2014-earned increase until 1/1/15, but if a participant not previously in pay had retired 7/1/14 with 1,000 hours for the year, the benefit payment would normally include the 2014 increase and start before 1/1/15.

[My 2 cents]

That's where we're coming from 2cents.

Historically, they have increased the benefit each month. So for example, if based on anticipated compensation they expect the participant to earn a $36 accrual for the year, they would increase the benefit $3 per month, and then true up the next year based on actual compensation. Clearly administratively burdensome, and doesn't make sense to increase the benefit at all prior to the participant completing 1,000 hours to accrue the benefit. And nothing in the prior documents we've seen supports this.

As part of our takeover we're trying to sort these sorts of issues and then document it. We'd like to not pay any 2014-earned increase until 1/1/15, but if a participant not previously in pay had retired 7/1/14 with 1,000 hours for the year, the benefit payment would normally include the 2014 increase and start before 1/1/15.

But in that case, the amount payable commencing on the 7/1/14 NRD would include an accrual covering all of 2014. Unless one were following that 1/12th of a year's increase kicks in every month process (really?), there would be no further changes to the monthly amount payable until 1/1/16 (reflecting the additional accrual for 2015), and even then, there would be no increases until 2015. I assume that the reference to 1,000 hours means that nothing further would accrue for the second half of 2014.

[shERPA]

Yes the amount commencing on 7/1/14 would include a full 2014 accrual. There would be no further increases becauses in my example this person retired.

The point is that the new retiree gets his full 2014 accrual on 7/1/14, as compared to the late retiree in pay status still working getting his 2014 accrual starting [the original question - what's the right date?]. Waiting until 2015 would be the easiest way to administer it, but this seems inconsistent with what the new retiree would get.

Yes they were really doing 1/12 of the increase each month. That can't be right given the 1,000 hour requirement.

[tymesup]

What does the plan doc say about Late or Deferred Retirement? Note there may be different treatment after age 70 1/2.