Normal Retirement Age Amendment - Need help

[amoy]

Recently, we took over a plan. In the original plan document, the normal retirement age was age 55 and 10 years of service. Effective as of 01/01/2009, the normal retirement age was amended to be age 62 and 5 years of participation due to IRS final regulation with respect to the normal retirement age back in 2007. But there is an early retirement age definition in the current plan document which is age 55 and 10 years of service, no reduction for the early retirement benefit. I assume it is used to protect the benefit was accrued before the amendment.

So there is a participant eligible on 01/01/2009, terminated in 2014 and he is age 38 in 2015. His accrual benefit based on the plan document is $1,000 per month. Below is the normal retirement benefit definition from the plan document.

"Normal retirement benefit. The amount of monthly retirement benefit to be provided for each Participant who retires on the

Participant's Normal Retirement Date shall be equal to the Participant's Accrued Benefit (herein called the Participant's Normal

Retirement Benefit). A Participant's Accrued Benefit is based on a retirement benefit formula equal to 3.25% of such Participant's

Average Monthly Compensation multiplied by the Participant's total number of Plan Years of Service (up to a maximum of 11 years),

computed to the nearest cent."

For my understanding, this participant was eligible on the same date the amendment became effective. So this $1,000 per month should be as of his normal retirement age which is 62. The early retirement age (55+10YOS) is not applicable to him.

Am I correct?

If yes, how about the participant eligible before 01/01/2009? Suppose Robert was eligible on 01/01/2008, terminated in 2014, and age 38 in 2015. His accrual benefit in 2014 is $1,000 per month. Is this $1,000 as of age 55 or age 62?

[John Feldt ERPA CPC QPA]

Robert will have a portion of his benefit that is payable at 55 and another portion that is payable at 62. However, for valuation purposes, since the plan has no reduction for the age 55 ERB, the actuary could perhaps assume 100% retirement probability at age 55 for Robert anyway, and for those situated like Robert, thus making the data entry and calculations just a bit easier.

[amoy]

@ John, I agree with you for the valuation purpose. But how about for the distribution purpose?

Suppose Robert's AB before 01/01/2009 was $200, and the AB after 01/01/2009 was $800. So for the distribution purpose, I will have to calculate two portions: the first portion of $200 is treated as of NRA 55 and the second portion of $800 is treated as of NRA 62. Am I correct?

[John Feldt ERPA CPC QPA]

Thanks, I missed the point that Robert was terminated.

The NRD of 55 and 10 applies to the portion of the accrued benefit that was accrued by the effective date of the NRD amendment (or if later, basically the date the amendment was executed). But be sure to take a careful reading of the document and the amendment.

A) Solely based on the language you included above, it appears that you would calculate the accrued benefit that was earned at the time the plan was amended, using average compensation and service through that date. Since it does not appear that a "fresh-start" approach was used, preserve that benefit as a minimum and it's NRD is age 55.

B) Now calculate Robert's benefit using the current formula which is a benefit payable at age 62 using current average compensation and all service.

Looks like the participant should get the greater of the benefit from A) or B). If that's all the document says about the formula, then this looks like the amendment was a "wear-away" amendment. The "new" provisions of the plan eventually, with new accruals, would catch up in value to the old preserved minimum benefit and therafter exceed the old benefit in overall value, thus wearing it away.

[david rigby]

For my understanding, this participant was eligible on the same date the amendment became effective. So this $1,000 per month should be as of his normal retirement age which is 62. The early retirement age (55+10YOS) is not applicable to him.

Just to be cautious, the 55/10 might be applicable, but it might have a different ER reduction. Whether it is relevant in the liability may depend on level of reduction (and the retirement decrements).

[amoy]

If no ER reduction, does it mean his benefit is $1,000 as of age 55?

[Effen]

Also be careful if he works or defers his benefit beyond age 55, he would either need a suspension notice, or he would need to receive an actuarial increase, or both an accrual and an increase. It depends on what the document says.

Changing the RA is a nice solution for valuation purposes, but it makes benefit calcs very complex.

[amoy]

I understand the assumption for NRA for funding/valuation purpose can be different from the NRA in the plan document. But when I am paying out someone, I should use the formula defined in the plan document and the NRA defined in the plan document. So if the NRA is defined as 62 in the plan document, then the 62 will be the NRA I am using for calculating the payout. The NRA assumption in the valuation report is irrelevant at this point.

[My 2 cents]

Technically, the assumption in the valuation report is for the "assumed retirement age". Presumably, for each possible retirement decrement date under the assumed retirement age assumption, the valuation calculations are factoring in whatever early or late retirement factors would apply at that date, based on the plan's actual NRA.

And one might look to the amendment that changed the normal retirement age under the plan to see what it says (i.e., does it call for a wear-away approach or something else, or does it provide for grandfather treatment for some participants?).

[Effen]

Based on your earlier post, the 62 retirement age only applied to post 2009 accruals. The benefits that were accrued prior to 2009 still have an age 55 retirement age attached to them. You cannot change the retirement age of an accrual since it is a right and feature of the benefit when earned. The benefit was payable at 55 when it was earned. You can't just change that to 62. That would be an impermissible reduction of value.

Therefore, if someone with a pre 2009 accrual, works beyond age 55, you need to deal with the late retirement issues associated with those accruals.

Accruals earned after 2009 are different because the retirement age is 62. Even though they are unreduced for early at 55, you don't have to adjust them between 55 and 62 because it is an early retirement subsidy and not the normal retirement benefit.