actuarial increases for deferred vested participants

[Guest actuary billybarooh]

Hello all,

I'm back in the defined benefit arena after an extended time period.

I have a client who says their actuarial equivalence definition is based on 417(e) segment rates with a 3-month look back, so October, 2014 segment rates are used for benefit commencement dates in 2015.

Is it permissible to apply an actuarial increase using 417(e) segment rates at the time of commencement? For example, they have a vested term who reached NRA in 2008 and wants a BCD of 1/1/2015. they want to use the October, 2014 segment rates for the whole increase.

I'm seeing some unusual changes in the late retirement benefit at 12/1/2014 vs. 1/1/2015. Because of the change in segment rates from October 2013 to October 2014, the late retirement increase at 1/1/2015 is less than the late retirement increase at 12/1/2014. So the resulting benefit at 1/1/2015 is less than what the benefit would have been at 12/1/2014. Does anyone know if this is permissible under the most recent IRS Regs?

Any guidance would be much appreciated.

[Andy the Actuary]

1. It's unusual for Plans to address TVs who have passed NRD. They're supposed to start then. If you haven't, check document to determine whether or not it specifies a particular treatment.

2. See 1.411(b)-1©(2)(d)(3) regarding decrease of AB owing to increase in age or service.

3. May need to amend plan to incorporate retroactive annuity start date.

4. If you're an attorney, fix it; else, confer with a benefits attorney.

[Effen]

In addition to everything Andy said, if you opt for the actuarial rollup, we would typically do that year by year based on the rate applicable for that year.

I think only using the current rate could be problematic because a changing interest rate could cause an accrued benefit to be lower in a particular year that it would have been based on the interest rate applicable to that year.

[Andy the Actuary]

Certainly, AE could change dynamically but only if (a) cause an increase in benefit and (b) was not discriminatory in operation. I'm an actuary and not an attorney so check with a benefits attorney for an opinion you can rely upon. Oh, I failed mention, I'm studying to be a politician.

[Calavera]

There were 2 very good articles on post-NRA distributions by Jim Holland that could be found here:

http://www.asppa.net/Document-Vault/PDFs/PCFALL2012.aspx

http://www.asppa.net/Document-Vault/PDFs/PCWINTER2013.aspx

Hope it helps.