Sec 415 Avg Pay Limit and Delayed Retirement

[Sellarsian]

Greetings … Apologies if this has been covered before, I couldn’t find it.

A long-service employee, not an HCE, is finally retiring at age 81. He is covered by a frozen traditional corporate DB plan.

The plan does not permit in-service distributions. The actuarial adjustment for late commencement covers only the period since the April 1 following his age 70.5 year (they provide the suspension notice at NRD) but is still pretty large — it increases his monthly pension from $2,900 to almost $9,000.

But his high 3-year average Section 415 compensation is $6,800/month. This limit is not adjusted for late commencement so his monthly pension seems to be capped at $6,800.

Under the old required beginning date rules, he would have been receiving $2,900/month for life since age 71 with no Section 415 issues. The law permitting plans to do away with in-service distributions for non-owners seemed to rely on the premise that the required actuarial increase would keep participants whole. But failure to adjust the % of pay limit for late commencement appears to prevent that here.

Am I overlooking something?

This employer has a frozen SERP for selected executives, but no general excess plan. They likely never anticipated one would be needed, but given their current financial plight there’s no chance that they will provide a top up from general assets.

[SoCalActuary]

Looks like he still gets 100% of pay for the rest of his life. He chose to work past the optimal retirement date. So just follow the law.

[jpod]

Unless I am confusing your situation with another, I think, in order to avoid an impermissible forfeiture under 411, he should have been receiving in-service distributions starting at the point in time his actuarial increased benefit exceeded the 415(b) limit. I believe there is a statement in the DB LRMs to that effect, if not published elsewhere.

[AndyH]

Agree with jpod

[Sellarsian]

Thanks for the replies. I will search for that guidance regarding the need to trigger commencement in-service to avoid a forfeiture. Assuming that that is what's out there -- is the conclusion that the plan should have provided for this, and now must be amended to provide for it retroactively? It has all along forbidden in-service distributions (except for 5% owners) ...

[Calavera]

Agree with jpod as well. Not sure if this situation requires VCP or self-correction is allowed. Plan needs to be amended to allow in-service distribution at least for these particular cases. Plan will owe him back payments with interest to I guess age 78 or so.

[My 2 cents]

Really and truly, does the plan contain no language like this:

"If as a result of actuarial increases to the benefit of a Participant who delays commencement of benefits beyond Normal Retirement Age the Accrued Benefit of such Participant would exceed the limitations under [plan provision dealing with 415 limits] for the Limitation Year, then distribution of the Participant's benefit will commence."

Assuming, of course, that the plan is not a governmental plan (they don't have to follow the 100% of pay limit under 415).

If there is no such provision, the plan should not have been able to receive a favorable determination letter. If there is such a provision, then the terms of the plan were not properly followed.

[VeryOldMan]

My question is how does this apply to a 5% owner?

[Mike Preston]

35 minutes ago, VeryOldMan said:

My question is how does this apply to a 5% owner?

Please elaborate.