QPSA: def of "earliest retirement age"

[roy819]

Assume a DB plan's NRD is age 65. It provides for early retirement at age 55 with 10 years of service, where the benefit is reduced at 3% per year. Also assumes the plan allows a participant to take a distribution from the plan at any time after termination. They can take a lump sum, or they can take an immediate annuity. If a participant takes an immediate annuity prior to their early retirement age, then they won't get the subsidized reduction. Their benefit is reduced based on the plan's definition of actuarial equivalence.

Further assume that the only death benefit provided under the plan is the required QPSA. An active participant dies at age 48 (with 15 years of service). The regulations in §1.401(a)-20 say to calculate the QPSA as of the "earliest retirement age", and A-17 in the regulations defines the earliest retirement age. It says that if the plan provides for voluntary distributions that commence upon termination of employment, then the earliest retirement age is "the earliest age at which the participant could separate form service and receive a distribution". 

If that's the case, then the QPSA is calculated at age 48, in the example above. It sounds like you would take the member's NRD benefit and reduce it to age 48 based on the plan's definition of actuarial equivalent. If the spouse chooses to defer the benefit - the regulations say that "the plan must make reasonable actuarial adjustments to reflect payment earlier or later than the earliest retirement age". So if the spouse defers the benefit, then it sounds like you take the QPSA (again, calculated at the member's age 48 with a reduction based on the plan's definition of actuarial equivalent) and then increase it actuarially to the date of commencement.

Whereas, if you calculate the benefit at the member's age 55 (with a subsidized reduction) and then further reduce it to age 48 based on the definition of actuarial equivalent, you'll get a much larger QPSA benefit because it includes the early retirement subsidy. You can make the argument that age 55 is the earliest "retirement" age - but then again that doesn't appear to be what the regulations state.

Any comments on how you've seen this calculated for plans that allow benefits at termination? Seems like the spouse could get a much smaller benefit if you treat age 48 as the earliest retirement age in which case they are not getting the advantage of the subsidized early retirement reduction.

[Draper55]

I think you reduce from normal to age 48 in your example per the reg...If the participant had quit on the day of death how would you calculate the J&S?..I think the QPSA reduction would mirror that approach...

[C. B. Zeller]

Since distributions can commence immediately upon termination, the definition of "earliest retirement age" from 1.401(a)(20) A-17(b)(2) applies.

Consequently the definition of QPSA from 417(c)(1)(A)(i) applies. In other words, the QPSA is the survivor annuity if the participant retired and took an immediate annuity the day before death. Which from what you described sounds like it means no subsidy.