In-service Withdrawals at Age 62 and Early Retirement Subsidies

[ERISAAPPLE]

If a plan with an NRA of age 65 is amended to allow a fully vested participant to take at 62 in-service withdrawals of the participant's "full accrued benefit," according to informal guidance from the IRS, that could create an early retirement subsidy.  The reason is the participant would receive, at least under the terms of the plan,  the same pension without reduction for early commencement that the participant would receive at age 65.  Does this same analysis apply for the modern CB plans? 

I know the prior guidance used to say that the interest credits up to the NRA were part of the participant's "accrued benefit" (or interest credits up to distribution, if taken out earlier)  Some say that at any given time the "accrued benefit" of a CB plan is the hypothetical account balance at that time.   

I'm not sure how all this works together in a CB plan post-PPA.  My question is whether a plan amendment that allows participants at age 62 to take their vested hypothetical account balance in-service would create an early retirement subsidy.  

 

[CuseFan]

Depends on what the plan says. If it says the age 62 account balance or actuarial equivalent thereof, then there wouldn't be a subsidy. However, if it specifically allows for commencement of the normal retirement benefit (annuity) unreduced, then you have a subsidy. Assuming your age 62 lump sum is the account balance and not the PV of the unreduced age 62 annuity, the subsidy would only happen for an annuity. 

[ERISAAPPLE]

Thank you CuseFan.  I am thinking if there is no whipsaw there would be no early retirement subsidy.  But I am not an actuary and therefore I am not sure.    

[Larry Starr]

I usually stay away from the actuarial discussions and just prefer to watch our actuaries beat each other up...... but in this case, I have a question  because I think (thought?) i had a clear understanding of this issue.  

Riddle me this:

Do you hold the opinion that it is possible to draft a cash balance plan with an age 65 retirement age that is able to pay to a participant age 62 the same as if the retirement age was 62?

Responses welcome.

[ERISAAPPLE]

Larry.  As the question is posed, that is an easy one.  The answer is yes, you can draft a cash balance plan with NRA as age 65 and allow participants to take their age 65 account balance at age 62.  You can draft a traditional DB plan with an NRA at 65 that allows participants to take their age 65 vested accrued benefit at age 62.   Clearly you can.  In n a DB plan, however, that clearly creates an early retirement subsidy.  

The question is whether the right to receive an age 65 hypothetical account balance at age 62 is an early retirement subsidy.  If you include interest credits to age 65 in the age 62, I think that has to create an early retirement subsidy (but I agree with you to leave that conclusion to the actuaries).  

The question I have is whether the right to the age 62 hypothetical account is an early retirement subsidy.  I believe (but I am not sure, which is why I am asking the question) if there is no whip saw there is no subsidy.  In other words, I believe that absent a whipsaw the hypothetical account at age 62 is the actuarial equivalent of of the age 65 benefit.  Again, I am not sure and so I am asking the question.

 

 

[Larry Starr]

9 hours ago, ERISAAPPLE said:

Larry.  As the question is posed, that is an easy one.  The answer is yes, you can draft a cash balance plan with NRA as age 65 and allow participants to take their age 65 account balance at age 62.  You can draft a traditional DB plan with an NRA at 65 that allows participants to take their age 65 vested accrued benefit at age 62.   Clearly you can.  In n a DB plan, however, that clearly creates an early retirement subsidy.  

The question is whether the right to receive an age 65 hypothetical account balance at age 62 is an early retirement subsidy.  If you include interest credits to age 65 in the age 62, I think that has to create an early retirement subsidy (but I agree with you to leave that conclusion to the actuaries).  

The question I have is whether the right to the age 62 hypothetical account is an early retirement subsidy.  I believe (but I am not sure, which is why I am asking the question) if there is no whip saw there is no subsidy.  In other words, I believe that absent a whipsaw the hypothetical account at age 62 is the actuarial equivalent of of the age 65 benefit.  Again, I am not sure and so I am asking the question.

"As posed", it was intended to be an easy one.

Now, the more interesting nuance:

Assume the hypothetical account is $3 million when the participant's age is 62.  The amount payable at age 62 depends on the 415 $ limit. Let's say that amount is $2.8 million if the plan's NRA is 62. Contrast that against a participant with a $3 million hypothetical account at age 62 in a plan with NRA 65. Do you think a document can be drafted so that the amount distributable is $2.8 million in that second plan?

[ERISAAPPLE]

5 hours ago, Larry Starr said:

"As posed", it was intended to be an easy one.

Now, the more interesting nuance:

Assume the hypothetical account is $3 million when the participant's age is 62.  The amount payable at age 62 depends on the 415 $ limit. Let's say that amount is $2.8 million if the plan's NRA is 62. Contrast that against a participant with a $3 million hypothetical account at age 62 in a plan with NRA 65. Do you think a document can be drafted so that the amount distributable is $2.8 million in that second plan?

I have no idea.  ?

[Larry Starr]

On 8/31/2018 at 5:10 AM, Larry Starr said:

"As posed", it was intended to be an easy one.

Now, the more interesting nuance:

Assume the hypothetical account is $3 million when the participant's age is 62.  The amount payable at age 62 depends on the 415 $ limit. Let's say that amount is $2.8 million if the plan's NRA is 62. Contrast that against a participant with a $3 million hypothetical account at age 62 in a plan with NRA 65. Do you think a document can be drafted so that the amount distributable is $2.8 million in that second plan?

Would anyone else like to take a shot at this one?

[dan.jock]

I think that if the NRA is age 65 and the plan has an unreduced early retirement benefit at age 62, then the 2.8M is distributable.  415: step 1 - calculate the plan benefit ($2.8M)) step 2 - compare to dollar limit (2.8M) 415 dollar limit is unreduced from 65 to 62.  I'd suggest merely amending (or designing) the NRA to be 62 to avoid this moot complication since for testing, you'd have to use the age 62 unreduced benefit anyhow in the MVAR.

-Dan

[ERISAAPPLE]

I'm not sure I am following this.  I am not steeped in the lore of 415 DB calculations.  But when I read Larry's more difficult question, I wasn't sure what the benefit was at age 62 in the plan that has an NRA of age 65.

I believe he said a participant in a plan with an age 62 NRA has a benefit of $3 million, but the 415 limit is $2.8 million.  His question also seems to assume that in the plan year the participant turned age 62, even if the plan has an 65 NRA, the benefit would be $3 million.

Dan.jock, it sounds like you are saying it doesn't matter though because the 415 limit at age 62 is the same as it is at age 65, whether the plan's NRA is age 62 or 65.   Am I understanding you correctly?