Accrual of Benefits after age 70 1/2 - actuarial increase

[AndyH]

This seems like a basic question but there seem to be different opinions.

For an active employee in an active plan, do additional benefit accruals after age 70 1/2 need to be actuarially increased to the start date? Example: participant age 75. Benefit accrued each year is $100 starting at age 70 1/2 (plus a benefit previously accrued which clearly must be actuarially increased to 75). Must these additional benefit accruals be actuarially increased to age 75?

Jim Holland's articles (linked below) seem to say yes.

Relevant IRS regulations seem to say yes.

Gray Book 2007-17 seems to say no.

http://benefitslink.com/boards/index.php?/topic/56689-actuarial-increases-for-deferred-vested-participants/#entry248292

QUESTION 17

Minimum Distribution Rules: Required Actuarial Increases

Question #34 from the 2000 Gray Book provided an example of a late retirement increase,

essentially comparing the accrued benefit based on all service and the actuarially increased

accrued benefits from each earlier April 1 in a plan with an April 1 anniversary date. The

subsequently released Question 8 from regulation §1.401(a)(9)-6 says the benefit payable must be the actuarial equivalent of the benefit from the April 1 following the calendar year in which the employee attains age 70 ½ “

plus the actuarial equivalent of any additional benefits accrued after

that date…” [emphasis added]. Does this mean the regulation requires an additional calculation beyond what was illustrated in the prior Gray Book (i.e., a calculation including actuarial increases on top of additional service accruals)?

RESPONSE

No. The phrase “any additional benefits accrued after that date” are those required under the

rules of IRC §411(b)(1)(H), which provide that an accrual for additional service during a year

may be offset by an actuarial increase for delayed retirement. The year-by-year calculation in

the 2000 Gray Book produces this result

[Calavera]

I believe the key is in the following question: Does plan provide for accruals after normal retirement age to be offset by actuarial increases in the benefit? The Gray Book emphasize "may be offset", which means it has to be spelled out in the document. Look at the difference between Situation 10 and Situation 11 in the Jim's article.

[Effen]

I don't remember exactly, but the 2007 gray book may have been was written before this was clarified in the regulations.

[AndyH]

Effen, do you now think the answer is clear? The 2007 gray book answer seems to be way off the mark. Or perhaps the respondents did not fully understand the question.

Calavera, it's my understanding (perhaps incorrectly?) that the offset is not permitted after age 70 1/2.

The document I am looking at says nothing helpful, and certainly has no specific offset provision.

It has a SOB provision so the offset is N/A through 70 1/2. Otherwise it basically incorporates the 401(a)(9) rules by reference.

I think post 70 1/2 benefits must be both the actuarial equivalent of the 70 1/2 benefit plus future accruals plus the actuarial equivalent increases on the future accruals. But I cannot find any clear example other than Jim Holland's article, and even that article does not detail what "actuarial equivalent of any additional benefits accrue" means. It seems obvious except that the gray book answer seems to dismiss it outright.

[Effen]

I do not think it is unclear any more.

Post NRD, but pre MRD:

1) must provide additional accrual based on additional age/service/compensation.

2) If plan provides for SOB, and SOB is timely provided, no actuarial increase of the NRD AB is necessary

3) if PA does not provide SOB, or document is silent about the SOB:

a) plan can state that late retirement ben is greater of AE of prior AB, or AB based on additional age/service/comp

b) if plan doesn't have specific language, need to provide BOTH rolled up value of prior AB AND additional age/service accrual (This one is a little gray, but recent IRS pronouncements indicate this is their current thinking. I don't think this is the way most people have been doing it, but that may be changing, or documents are getting clarified. In the past, I think most people just did "a", regardless if the plan had specific language or not.)

Post MRD: need to provide BOTH rolled up value of prior AB and additional age/service accrual. This assumes plan contains provision to allow participant to defer receipt of benefits beyond MRD if they are still working. If they are receiving a benefit, no rollup is required since they received the value of the benefit.

So, yes, I agree that "post 70 1/2 benefits must be both the actuarial equivalent of the 70 1/2 benefit plus future accruals plus the actuarial equivalent increases on the future accruals". I think of this as a day by day calculation, but I think you are permitted to do it once per year.

Also, keep in mind the Gray book is NOT official. There are lots of conflicting and incorrect responses in them. They really only represent "current" IRS thinking.

[AndyH]

Thank you.

[david rigby]

If there are many years of AE increase, don't overlook 415 limit.

[My 2 cents]

Didn't question and answer 4 of Notice 97-75 explicitly permit the offsetting of new accruals by actuarial increases applied to benefits already earned? So it would not be necessary to tack on new accruals for a year after attainment of age 70 1/2 if they are not more valuable than the actuarial increase being applied with respect to that year to prior accruals?

[Calavera]

Ex 10 and 11.xlsxWell, it took me a while to dig through the examples 10 and 11 in Jim's article. I have to say that I agree with the Example 10 solutions, but disagree with the Example 11 solutions.

1. I believe Jim actually miscalculated the age 71 monthly benefit amount by accidentally projecting it to age 72.

2. I still disagree that post MRD need to provide both, actuarial equivalent and accruals, when plan provides for accruals after NRA to be offset by actuarial increases in the benefit.

There are two reasons for my disagreement on post MRD calculations:

1. A-9 of 1.401(a)(9)-6 states that the actuarial increase required under section 401(a)(9)©(iii) for the period described in A-7 of this section is generally the same as, and not in addition to, the actuarial increase required for the same period under section 411 to reflect any delay in the payment of retirement benefits after normal retirement age. (emphasize mine)

2. Gray Book 2007-17 states that “any additional benefits accrued after that date” are those required under the rules of IRC §411(b)(1)(H), which provide that an accrual for additional service during a year may be offset by an actuarial increase for delayed retirement.

Attaches is my Excel file development of Jim's solutions and my version of the Example 11 solution.

Please refer to David Rigby's and My 2 cents' disclaimers above and check with plan's ERISA counsel second.

[AndyH]

Well thanks for all the comments, but I have to say that upon closer read, the second JH article actually does not address my question at all.

Before Situations 10 and 11 in the article, it states "In the situations presented below the required beginning date under the terms of the plan is the April 1 following attainment of age 70 1/2." [As opposed to actual retirement if later for non 5% owners]

In both examples it states that "No benefits are paid before retirement under the terms of the plan except that benefits are to commence at the required beginning date".

So in neither case does the article address what benefits must be provided when a plan allows the deferral of benefit payments beyond age 70 1/2. Instead it addresses corrective action upon failure to distribute timely.

I'm beginning to think that the RBD as defined by the plan governs, and that My 2 cents' point is correct.

(And we have yet to reach a consensus in my office which is why I am raising the question).

[Calavera]

I believe your question is still valid. Jim was trying to address several different issues in one example such as:

missing RMD's payments, actuarial increases post 65, SOB, actuarial increases post 70 1/2, offset of benefits by benefits received, etc.

So the way I see it in your case:

Step 1 - Does plan provide for accruals after NRA to be offset by actuarial increases in the benefit?

Step 2 - If no - follow first part of example 10 until age 75. If yes - follow first part of example 11 (my version) until age 75.

However, if you think that the offset is not permitted after age 70 1/2 even if the answer to the Step 1 question is "Yes", then follow example 10.

[Hilton]

The rule that benefits cannot be stopped or reduced upon the participant reaching any particular age becomes a key player here. That clearly means that accruals cannot be stopped, if the plan language allows for an offset of accruals by the required Actuarial increases then that is allowed. In the absence of specific plan language then there must be a dual stream calculation that incorporates the accruals and the actuarial increases.

[AndyH]

Makes sense, but what exactly do you mean by "incorporates" and "dual stream calculation" in the situation where the plan does not have specific language?

[My 2 cents]

Makes sense, but what exactly do you mean by "incorporates" and "dual stream calculation" in the situation where the plan does not have specific language?

Based on my understanding (assuming support from plan language):

At the end of each plan year (or date of separation from service), the greater of Calc A or Calc B:

Calc A: Last year's greater of Calc A or B, actuarially increased from last year to this year (calculation as of end of year only, until separation from service, even if a mid-year calculation would have put the person up over the 100% of 3-year average limit under 415 - the application of the 415 limit is done only at the end of the plan year or separation from service and there is no prohibited loss of value - and thus no mid-year forced commencement - if the participant would, on a continuous measurement, have hit the limit mid-year but continued in service)

Calc B: The determination of the plan benefit, taking into account all post-NRA (and even post 70 1/2) accruals and without regard to any actuarial increases for deferral.

This holds even after attainment of age 70 1/2. Assuming that the plan calls for offsetting new accruals by actuarial adjustments to prior accruals, it is never necessary to start having unreduced new accruals on or after 70 1/2.