Jump to content

70.5 continued accruals and better of calc


Recommended Posts

If a plan provides for actuarial increases after 70.5 and also provides for continued accruals but does not provide a "better of" calculation, can PA make administrative decision to do "better of" calculation for benefits?

Link to comment
Share on other sites

Your question makes no sense.

Plans may provide that if a participant continues employment after Normal Retirement Date, then one may offset continued accruals under the formula by actuarial increases. Example: Person is working after Normal Retirement Date. The plan may specify that the amount payable at the end of this year is equal to the greater of the amount determined using service and earnings through the end of this year or the actuarial equivalent of the amount payable as of the end of last year. Not actuarial increases plus continued accruals. It is my understanding that this practice (if specified in the plan) is perfectly acceptable and can continue past age 70 1/2.

Or perhaps by saying that the question makes no sense, you mean something like "Of course you can't make an 'administrative decision' to provide smaller benefits than the plan calls for!"

Always check with your actuary first!

Link to comment
Share on other sites

Precisely. You must follow the terms of the plan. If the benefit at the end of year 1 is A and the benefit under the terms of the plan at the end of year 2 is A' + B where A' is the actuarial equivalent of A and B is the accrual for the year in question then you must pay A' + B and there is no room whatsoever to pay the lesser of (A', A+B).

Link to comment
Share on other sites

Just to clarify, post 70.5 the plan MUST give BOTH actuarial increase and age/service increase. Prior to age 70.5 it is permitted to give the greater of (assuming the plan calls for it), but post 70,5 it most give both.

1.401(a)(9)-6

Q–9. How does the actuarial increase required under section 401(a)(9)©(iii) relate to the actuarial increase required under section 411?

A–9. In order for any of an employee's accrued benefit to be nonforfeitable as required under section 411, a defined benefit plan must make an actuarial adjustment to an accrued benefit, the payment of which is deferred past normal retirement age. The only exception to this rule is that generally no actuarial adjustment is required to reflect the period during which a benefit is suspended as permitted under section 203(a)(3)(B) of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829). 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. However, unlike the actuarial increase required under section 411, the actuarial increase required under section 401(a)(9)©(iii) must be provided even during any period during which an employee's benefit has been suspended in accordance with ERISA section 203(a)(3)(B).

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

"Just to clarify, post 70.5 the plan MUST give BOTH actuarial increase and age/service increase. Prior to age 70.5 it is permitted to give the greater of (assuming the plan calls for it), but post 70,5 it most give both."

Nothing in what you cited says that a plan must give both.

Link to comment
Share on other sites

"However, unlike the actuarial increase required under section 411, the actuarial increase required under section 401(a)(9)©(iii) must be provided even during any period during which an employee's benefit has been suspended in accordance with ERISA section 203(a)(3)(B)."

This means you must provide an actuarial increase post 70.5. ERISA requires that you provide the age/service accrual. Therefore, post 70.5, you must provide both. I am pretty sure this was explained in a Gray Book question. I will check on Monday.

I have added q/a 7 & 8 for additional clarification.

Q-7. If an employee (other than a 5-percent owner) retires after the calendar year in which the employee attains age 701/2, for what period must the employee's accrued benefit under a defined benefit plan be actuarially increased?

A-7. (a) Actuarial increase starting date. If an employee (other than a 5-percent owner) retires after the calendar year in which the employee attains age 701/2, in order to satisfy section 401(a)(9)©(iii), the employee's accrued benefit under a defined benefit plan must be actuarially increased to take into account any period after age 701/2 in which the employee was not receiving any benefits under the plan. The actuarial increase required to satisfy section 401(a)(9)©(iii) must be provided for the period starting on the April 1 following the calendar year in which the employee attains age 701/2, or January 1, 1997, if later.
(b) Actuarial increase ending date. The period for which the actuarial increase must be provided ends on the date on which benefits commence after retirement in an amount sufficient to satisfy section 401(a)(9).
Q-8. What amount of actuarial increase is required under section 401(a)(9)©(iii)?
A-8. In order to satisfy section 401(a)(9)©(iii), the retirement benefits payable with respect to an employee as of the end of the period for actuarial increases (described in A-7 of this section) must be no less than: the actuarial equivalent of the employee's retirement benefits that would have been payable as of the date the actuarial increase must commence under paragraph (a) of A-7 of this section if benefits had commenced on that date; plus the actuarial equivalent of any additional benefits accrued after that date; reduced by the actuarial equivalent of any distributions made with respect to the employee's retirement benefits after that date. Actuarial equivalence is determined using the plan's assumptions for determining actuarial equivalence for purposes of satisfying section 411.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

I still think that:

1. After NRD and before 70 1/2 plan has to provide BOTH (AE and Accruals) unless Suspension of Benefit Notice is provided, and AE is not required

2. After 70 1/2 plan has to provide BOTH (AE and Accruals)

3. In both cases new accruals may be offset by AE increases if plan has proper language.

Link to comment
Share on other sites

I still think that:

1. After NRD and before 70 1/2 plan has to provide BOTH (AE and Accruals) unless Suspension of Benefit Notice is provided, and AE is not required

2. After 70 1/2 plan has to provide BOTH (AE and Accruals)

3. In both cases new accruals may be offset by AE increases if plan has proper language.

Number 3 is the key - if the plan calls for offsetting new accruals by the actuarial adjustment applied to prior benefits, attainment of age 70 1/2 does not require any doubling up. It is a given that if the plan provides any accruals at all, they cannot be shut off at NRA or any other age. Some plans, purporting to follow suspension procedures, do not provide actuarial adjustments for deferrals. It is indisputable that there must be at least a comparison to actuarially adjusted values after 70 1/2, but if the plan provides for using the greater of straightforward application of the benefit formula (service and earnings) through the end of the year or the actuarial equivalent of the prior year's higher amount, it need not switch to an A+B approach just because the person has reached 70 1/2.

Always check with your actuary first!

Link to comment
Share on other sites

2007 Q&A 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.
Link to comment
Share on other sites

Thank you all for the clarifications.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...