Changing NRA (60 to 55)

[David]

I am working on a 14 participant DB plan which currently has an age 60 NRA. The sponsor may want to change to an age 55 NRA, leaving the formula as is (80% x AvePay x Svc/25). Exactly one-half of the participants will go from the age 60 415 limit to the age 55 415 limit. Accrued benefits for everyone would instantly become payable at age 55. One participant (an officer) is currently age 54. The required contribution would triple (which pleases the sponsor). Is this NRA change possible as described? Any input is greatly appreciated.

[mwyatt]

How well funded was this plan prior to the change in retirement age? Although your sponsor may want to do this, I would at least check out where your funding status will be after amendment to make sure you haven't created an underfunded plan here.

[David]

Including the current year required contribution, the plan assets are about 85% of the pvab based on funding assumptions (and almost the same on plan term assumptions). About 10% more unfunded after the change (again including the current yr req contr in the assets).

[This message has been edited by David (edited 03-09-2000).]

[AndyH]

I know there is controversy over this, and some may take issue with it, but Jim Holland said at ASPA 10/99 in response to a Q&A that the IRS "has the authority to interpret" NRA as something other than what is in the plan document based upon actual retirement patterns, so I think that if they decided to challenge it the deductions may be at risk.

We don't use NRAs of 55 due to the potential liability.

[mwyatt]

I think you really need to think this out, especially in light of an officer being age 54. Clearly the early termination restrictions apply in this case so your officer has no chance of exercising any lump sum option next year (I'm assuming that since this is a small plan that LS payments are available and that this is a top heavy plan). Remember also that TH minimum accrual percentage of 2% is NOT adjusted downward for earlier NRA so the front-loading for non-key employees is going to get even worse.

The real point is that your plan is underfunded before the change in NRA; moving to an earlier NRA will make it worse. Your substantial owners are only going to be able to make their exit under the Early Termination restrictions of IRC 401(a)(4) or upon plan termination they are going to have to reduce their benefit. I'd try to project out to some reasonable wind up date and see where liabilities end up before proceeding.

[David]

TH benefits are not really a concern in this plan. The top 25 restriction is a noteworthy issue which I will mention when discussing the change with the plan sponsor. I think that in a couple of years the assets (after LS dist) will be greater than 110% of the CL, allowing the lump sum to the officer in question. There are ways around the restriction though, such as a bank letter of credit or posting a bond.

I really appreciate the helpful feedback. By the way Andy, I too have some concerns with an age 55 NRA, I would like to hear what others think/have experienced on this issue.

[david rigby]

I second the concerns from mwyatt.

I do not like the decrease of the funding percent (a small decrease would not be a problem, but a 10% decrease is cause for concern). Also, as I understand your phrasing, David, you are evaluating that percent by including the current year contribution. I don't think the IRS is likely to look at it that way. What are your percentages without the current year contribution?

[David]

Practically, it is the 2 officer/owners that are at risk for a couple of yrs until the funding catches up. Changing to NRA 55, the funded status w/o the current yr contribution is 61%, but if you eliminate those two from the liability, the funded status is 95%.

[david rigby]

I think you have missed my point.

What is the funded percentage of the plan (BoY) before the proposed plan change, and what is the percentage after the proposed plan change?

Also, this discussion has centered on a change in the plan definition of NRA. An alternative might be to change the actuary's assumed retirement age, if there is evidence that such change is appropriate to the particular plan participants.

A friend once told me, "Pigs get fat, but hogs get butchered."