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Post retirement benefits - plan terminating


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Hi Guys,

Please help in sticky situation.

The plan is frozen since 2003. The plans NRA is 62. The DOPT isin 2014. Expected payout date is in 2015. The owner currently is67. Each year he is over NRA he got an AI of his frozen benefit. However the AI was capped at his 415 comp limt. Suspension of benefit notice not given.

My first question is that is his comp limt also gets frozen at the plan freeze date? The guy has 10 YOS at the time of freeze, however is comp increase after the freeze date.

Is there a violation of 411 here? Should he have been given a forced suspension of benefits notice at the time the AI first hits the comp limit?

What if in between the comp drops and now he can get the full AI? I guess first it has to be clear if his 415 comp limit can change or not?

If there has been a violation of 411 what are the corrective measures?

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I'll give this a shot. (I saw nothing in the 415 regs.) Likely, the terms of the freeze amendment are the important guide. If the amendment did not specfy any particular handling for 415, then the common use of "freeze" is to assume it applies to all aspects of an accrued benefit.

There are three Q&As in the Gray Book that you can read, and perhaps glean something.

Section 415: Increases in Benefit Limited by §415 after Plan Formula Freeze
A defined benefit plan participant who has four years of participation service has his accrued benefit limited to 4/10 of the otherwise applicable §415 dollar limit. The defined benefit formula is amended to freeze service and compensation and remove the §415 COLA increases (such that there are no further increases in accrued benefit). Assume the participant will continue to earn years of service and participation for at least an additional six years.
a) In calculating the §415 dollar limit, can years of participation include years after a plan has been amended to freeze service accruals and compensation?
b) If the answer to (a) is no, does the answer change if the plan is amended to reduce the accrual rate to 0% rather than freezing service and compensation?

a) No. For purposes of §415, “years of participation” are only credited if the employee completes the number of hours needed under the plan to accrue a benefit for the year. A plan that has been frozen does not provide for any such benefit accrual and therefore the participant cannot earn additional “years of participation.”
b) No.

QUESTION 2014-24
Section 415: Required Availability of In-Service Withdrawals – Normal Form or Any Form
In cases where actuarial increases cannot be provided because of the §415 limits, §1.415(a)-1(f)(7) requires suspension of benefits or commencement of distributions. Further, only the commencement alternative and not the suspension alternative, is available after the April 1 following age 70 ½. Suppose that considering the life-only annuity payment form the benefit would have to start on September 1 to avoid a §415 violation if the participant elected that form of benefit. However, if the participant elects the lump sum form of payment, the benefit would have had to start earlier during the year to avoid a forfeiture. This situation occurs because the plan’s lump sum conversion basis (§417(e)) produces a more favorable conversion than the 5.5% interest rate used for §415 purposes. May the plan start benefits on September 1, or is the plan required to find the earliest date the benefit in any available form would exceed the §415 limit and put the benefit in pay status at that date?

Early and optional form factors are not protected by §411(a) – just by §411(d)(6). So it is acceptable to cut back subsidies in the early or optional benefits because of the §415 limit. The plan should be written to limit the accrued benefit at normal retirement age (or later) in the normal form.

For the post normal retirement age period, actuarial increases would be protected by §411(a) to the extent necessary to satisfy the rule in §1.411(a)-4 about reasonable actuarial adjustments. For a benefit limited by the §415 dollar maximum, the plan terms can and must limit the late retirement actuarial increase to the lesser of the plan factor or the §415 factor. Any differential would be forfeited. In the situation where the §415 three-year average compensation limit applies, the §415 limit is not increased and there is no “permission” under the regulation to forfeit any differential. For that situation, the required annuity starting date would be based on the date the benefit (in the plan’s normal form) with additional accruals or actuarial increase reaches the compensation limit.

QUESTION 2014-26
Section 415: EPCRS Correction of Failure to Start Payment
In cases where actuarial increases cannot accrue or be paid because of the §415 limits, §1.415(a)-1(f)(7) requires suspension of benefits or commencement of distributions. How are failures to start benefits when participants reach the §415 compensation limit (so they cannot receive further required actuarial increases and benefits cannot be forfeited) corrected under Employee Plans Compliance Resolution System (EPCRS)? For a plan that does not call for any suspension of benefits (or does, but fails to provide notices) this would apply to periods after age 65, and for a plan that does call for the suspension of benefits during continued employment (and does provide notices) this would apply to periods after the April 1 following the attainment of age 70 ½ when §401(a)(9) requires that actuarial increases be provided.

The plan sponsor can self-correct this type of §411/§415 failure under EPCRS using an approach similar to that used to correct failures to start benefits at the required beginning date by paying back payments with interest. The back payments are not counted toward §415 for the year actually paid, but for the year they should have been paid. The interest rate used to determine interest on back payments should come from plan provisions used to determine actuarial equivalence (after considering the applicable requirements of §417(e)(3), §415(b) or any other applicable provisions) that were in effect on the date the distributions should have been made. For a plan with a variable actuarial equivalence basis (e.g., §417(e)), the assumptions used would be those in effect on the date the distribution should have begun unless the plan specifies otherwise.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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