Fractional Accrual rule for Fresh Start w/ Add-on

[dmb]

Can a benefit formula with a fresh start date with an add-on benefit satisfy the fractional accrual rule?  It has recently been suggested to us that such a formula doesn't satisfy the fractional accrual rule.  Has anyone had any issues with this?  If so, a cite would be appreciated.  Thank you.

[Effen]

Can you be more specific?  Can you tell us exactly how the new formula would work.

Not sure what you mean by "add-on" benefit.   

 

[dmb]

Sorry, below is a bit more information:

Defined benefit plan has a benefit formula that is "Formula Without Wear-Away" under 1.401(a)(4)-13(4)(i).  The accrued benefit under the plan is equal to the Frozen Accrued Benefit (determined as of the day prior to the Fresh Start Date) plus the accrued benefit determined under the current formula (in effect from the Fresh Start Date forward).  The accrued benefit under the current formula is determined using the fractional accrual rule.

In applying the fractional accrual rule, only years from the Fresh Start Date forward are considered.  A Q&A from 8/11/2006 seems to agree that the total accrued benefit can be determined in this manner.

Can the total accrued benefit be determined as described in the Relevant Background section? An IRS reviewer is telling us that "the fractional rule cannot be used with formula without wear-away fresh start rule".  He is relying on Sample Plan Language.  I believe the Sample Plan Language prohibits the total accrued benefit from being determined as the sum of (a) the Frozen Accrue Benefit plus (b)the current formula applied to years from the Fresh Start Date to Normal Retirement Date and the sum multiplied by a fraction, the numerator of which is all years of Benefit Accrual Service to date of termination (including years that were used to determine the Frozen Accrued Benefit) and the denominator of which is all years of Benefit Accrual Service to NRD (including years used to determine the Frozen Accrued Benefit).  Is there a specific cite from the regulations that allows (or prohibits) the accrual as described in the Relevant Background Information?  Is the wording of 1.401(a)(4)-13(4)(i)(B) "as applied to the employee's years of service after the fresh-start date" what allows the accrual as described in the Relevant Background section?

 

[My 2 cents]

It is my understanding that the fractional rule won't work for cash balance accruals.  You probably have to satisfy the 133% rule.

It is my understanding that passing the accrual rules in a cash balance situation is limited to comparing the current or any future plan year's expected accrual (expressed in terms of a monthly benefit payable at a given future time, presumably as of Normal Retirement Age (such as 65 - none of that fakery of saying that NRA is the completion of 3 or 5 years of service without regard to age) to that of any subsequent plan year, and being able to demonstrate that all such comparisons come in with the later year's accrual not exceeding 133% of the earlier year's..

It is a basic fact of the process of determining whether a plan meets the accrual rules that it is utterly irrelevant how one got to the current accrued benefit, especially when using the 133% choice.  Passing the accrual rules only involves comparing accruals for the current and future plan years. 

[dmb]

This is not a Cash Balance plan.

[My 2 cents]

25 minutes ago, dmb said:

This is not a Cash Balance plan.

OK, so the benefit structure is A+B, where A is a fixed amount and B is the ongoing non-frozen traditional benefit formula.  If B lacks back-loading, how could the fractional rule fail?  If the per-year accrual under B is higher than under A but not otherwise back-loaded, why would it not pass the 133% test?  Is there a problem here?