Accrual of Benefits under Elapsed Time

[CharlesLeggette]

A Cash Balance plan uses ET for benefit accrual....so a participant joins plan 1/1/2015....terminates 12/28/2015....looks to me like she gets no benefit accrual [Pay credit] for year.

Any thoughts -- I haven't seen an ET plan in about 15 years.

[Lou S.]

I think it is more complicated than that but I haven't reviewed the accrual rules for DB plans using elapsed time accrual in some time.

[mphs77]

I would think that so long as the Plan passes coverage and non-discrimination, then she would get no accrual.

[My 2 cents]

Cash balance plans shouldn't be allowed to condition a year's pay credit on being employed on the last day of the year. Maybe they can, but they shouldn't be able to. A cash balance plan is not subject to the rules applicable to defined contribution plans.

Don't elapsed time plans have to give credit for all periods of employment? She worked 362/365ths of a year.

Does the plan say anything to indicate that to receive a pay credit for a plan year, the participant must be employed until the last day of the plan year?

[CharlesLeggette]

You're not understanding --- the action of elapsed time appears to require 12 full months for accrual, their termination on 12/28 means they have not earned a year of accrual svc....its not last day.

[Belgarath]

I'm not convinced the regs are terribly clear on this. Take a look at 1.410(a)-7(e)(2).If you plow through that garbage and the references, I THINK ( but I'm not by any means certain) that you have to credit at least a partial year of service. And I sort of lean toward having to count a full year in your situation, since there really is no hours requirement. But I defer to the actuaries on this one...

[CharlesLeggette]

So I went to FT William and posed the question to them --- bingo ---in the example I gave $0 - Pay Credit --- which is what I believed...so in a Partner centric Plan, if a Partner leaves on 12/28 -- NO ACCRUAL if an elapsed time accrual plan -- this is a huge help in clearing the 'terminating' partner issue and making a Cash Balance plan easier to navigate...here is the FT William response:

Hi Charles,
That would be correct. They need to be there for the entire eligibility computation period to accrue a benefit.

Please let us know if you have any other questions.
Best regards,

Product Support Manager, ftwilliam.com
Wolters Kluwer Law & Business

Question:

Under the Cash Balance doc using elapsed time for benefit accrual , if someone becomes a part on 1/1 and leaves on 12/28, do they get a piece of a year of accrual.My reading says they get zip.

[Belgarath]

Interesting. Thanks for posting that response. I neither disagree nor agree, since I wasn't sure in the first place! But as an observation, it sure sounds like a last day requirement to me, whether explicitly stated as such or not. Under the interpretation above, you don't get 12 months unless you are employed on the last day. My gut feeling is that something seems amiss with that. Fortunately, it isn't anything I have to worry about, and for that, I'm very happy!

[AndyH]

As usual, I agree with Belgarath's comments. My (old) version of The ERISA Outline Book agrees that the guidance is not especially clear, but the EOB does suggest that at least a partial year of credit is appropriate, if not a full year, in such a circumstance.

I would not rely on the ftwilliam opinion alone.

[CharlesLeggette]

I have asked for a similar response from Datair's Plan doc gurus.

[GMK]

It's a 12 month requirement, not a last day requirement. It only looks like a last day requirement because this participant started on 1/1.

Until 12 months have elapsed, you don't get credit for 12 months. Wouldn't object to giving partial credit if the Plan Doc allows it.

[AndyH]

Another question - does the plan clearly state that pre-participation service isn't credited for benefit accrual purposes?

[david rigby]

Some people think "advice" from Sal Tripodi trumps advice from anyone else.

[CharlesLeggette]

Sal is just another opinion -- and usually a good one --- but Rob Richter of Sungard is darn near always spot-on...I've asked his opinion on this --- film at 11.

[rcline46]

The 'problem' with elapsed time is that the basis is an employment year. It is my opinion that if said person completed their 12 months on January 2nd (calendar year plan) then they earned an accrual year for that plan year and would be due a contribution.

I would consider this a bad plan design. It is ok if you do vesting on elapsed time, but not accrual. (IMNSHO) Then add in service spanning rules and if the person is NOT gone at least 12 months then there is no break. It will get messy too quickly as Mr. Leggette is finding out (for accruals).

[CharlesLeggette]

I think you're mixing metaphors...I agree with what you say regarding vesting -- but benefit accrual is based on Plan years of Participation in a Cash Balance Plan, so no issue there in my opinion...

[FAPInJax]

A cash balance plan is still a defined benefit plan. There would be no way to use elapsed time and not provide fractional accrual of the contribution credit (the same way that fractional accrual of the benefit formula would occur) in my opinion.

[CharlesLeggette]

Consult your Plan doc provider [FTW,Sungard,Datair, ASC,etc]...I think you'll find all require point to point employment under elapsed time ....even for vesting.....consider the 1,000 hour rule...there isn't any fractional accrual for 999 hours.

[Calavera]

Under elapsed time method, if you earn benefit service (even if it is less than a full year), you cannot disregard it for the benefit accruals (see 1.410(a)-7). I agree with all prior replies where at least partial accrual has to be credited.

However you have to follow the plan document. It appears, your document is trying to hide the "last day rule", which is not allowed under DB plans. But, if this is how it was administered, and you have a determination letter, I suggest amending the plan document prospectively to fix this situation.

[CharlesLeggette]

Well, you'd be wrong -- here's what the FTW Plan doc says....

This is straight out of the Plan doc

A Participant meets the service requirements for Principal Credits if he or she is employed by the Company on the last day of such Plan Year, or he or she completes at least 12 consecutive calendar months of service. In order to determine the number of whole years of service, nonsuccessive periods of service during a Plan Year and less than whole year periods of service during a Plan Year shall be aggregated on the basis that 12 months of service (30 days are deemed to be a month in the case of the aggregation of fractional months) or 365 days of service are equal to a whole year of service during such Plan Year. An Employee will also receive credit for any Period of Severance of less than 12 consecutive months, subject to the exemptions, terms and conditions of DOL Reg. section 2530.200b-9.

[Calavera]

You may have a DB plan document with the last day rule. It doesn't make it right. You can eirther amend the document, or wait until it is discovered by IRS/DOL (if ever). This is a common error in cash balance plan documents. See prior discussions on this topic:

http://benefitslink.com/boards/index.php/topic/41342-cash-balance-plan

http://benefitslink.com/boards/index.php/topic/40165-allocation-conditions-in-cash-balance-plans

http://benefitslink.com/boards/index.php/topic/55910-benefit-accrual-different-methods

[CharlesLeggette]

This plan doesn't have a last day rule provision, I just posted that as being from the FTW doc. it is an elapsed time plan that defines a Year of Benefit Accrual Service as an elapsed time Period of Service, that is 12 mos.....if you don't have a year of accrual service you don't get an accrual.

[Mike Preston]

And just because the plan has a provision that violates ERISA you want to celebrate? Most of us don't like exposing our clients to ERISA claims even if we have a document that is mistakenly approved by the IRS>

[CharlesLeggette]

OK Mike, I absolutely respect your opinion. So a Plan has an elapsed time definition of Benefit Accrual.Service... Two employees each with annual pay of $100k start participation after meeting the eligibility scheme on Jan 1, 2016.One terms on Mar 1, the other terms on Dec 25.The Plan is a CB Plan with a pay credit of 10%....please explain to me what pay credit you would award each of them. Assume the plan has full vesting.Thanks in advance.

[Belgarath]

It's interesting - I could have saved myself some time by reading Sal's stuff before I plowed through all the regs and cross references, because I ended up focusing on the precise phrase that Sal mentions in his analysis. See section in bold below. This phrase is what seems to me to prohibit requiring the full 365 days. But again, the whole subject is obscure enough that I do think there is room for reasonable disagreement.

(e) Benefit accrual. (1) For purposes of section 411(b), a plan may provide that a participant's service with an employer or employers maintaining the plan shall be determined on the basis of the participant's total period of service beginning on the participation commencement date and ending on the severance from service date.

(2) Under section 411(b)(3)(A), a defined benefit pension plan may determine an employee's service for purposes of benefit accrual on any basis which is reasonable and consistent and which takes into account all service during the employee's participation in the plan which is included in a period of service required to be taken into account under section 410(a)(5) (relating to service which must be taken into account for purposes of determining an employee's eligibility to participate). A plan which provides for the determination of an employee's service with an employer or employers maintaining the plan on the basis permitted under paragraph (e)(1) of this section will be deemed to meet the requirements of section 411(b)(3)(A), provided that the plan meets the requirements of 29 CFR 2530.204-3, relating to plans which determine an employee's service for purposes of benefit accrual on a basis other than computation periods. Specifically, under 29 CFR 2530.204-3, it must be possible to prove that, despite the fact that benefit accrual under such a plan is not based on computation periods, the plan's provisions meet at least one of the three benefit accrual rules of section 411(b)(1) under all circumstances. Further, 29 CFR 2530.204-3 prohibits such a plan from disregarding service under section 411(b)(3)© (which would otherwise permit a plan to disregard service performed by an employee during a computation period in which the employee is credited with less than 1,000 hours). See the regulations under section 411(b) (relating to benefit accrual).

[FAPInJax]

I will provide my methodology with respect to the two employees:

1 would receive an allocation based on the number of days through March 1 divided by 365 times 10%

2 would receive a similar allocation through December 25th.

[Calavera]

I will provide my methodology with respect to the two employees:

1 would receive an allocation based on the number of days through March 1 divided by 365 times 10%

2 would receive a similar allocation through December 25th.

Either that, related to the annual pay, or just 10% of the actual pay. Giving 10% of actual pay mutiplied by days ratio may be classified as a double proration.

Also note that the bolded section in Belgarath's post is the language from 1.410(a)-7(e).

[Mike Preston]

It is a DB plan. If the plan uses the 1,000 hr rule then the Mar 1 guy gets squat, while the other gets a full accrual. If you don't like that, you can use the pro-ration rule that gives the Mar 1 guy squat and the other one the ratio of hours worked to the hours needed for full accrual.

If you need a last day rule you need a DC plan.

[CharlesLeggette]

Mike, I said Plan uses Elapsed Time...why do you keep saying 1,000 hour rule.

[Mike Preston]

See the highlighted section of the previously quoted reg. [Message #25]. That language is also in the document provision you yourself posted.

Isn't this horse dead?