SECURE Act: Required Beginning Date: Actuarial Increases in DB Plans

[rocknrolls2]

As you already know, Code Section 401(a)(9)(C)(iii) provides that if a participant who is not a 5% owner has his or her required beginning date be the April 1st of the calendar year following the calendar year in which s/he retires, the plan is required to actuarially increase benefits after the employee attained age 70 1/2. When the SECURE Act increased the age for the required beginning date from 70 1/2 to 72, it did not increase the age at which actuarial increases are required to begin to be made. Is this merely an oversight or intentional? Any thoughts about what the IRS or Treasury intended to do in this provision?

[Peter Gulia]

A week ago, American Retirement Association said:  “This appears to require a technical correction, unless Treasury and IRS find sufficient statutory authority to clarify in regulations.”

https://www.asppa.org/sites/asppa.org/files/PDFs/Comment Letters/20.02.12 ARA Comment Letter to Treasury - SECURE Act guidance.pdf

I’m curious:  If Congress could think about it, what would be good public policy?  Why?

[Sellarsian]

Traditionally,  DB participants could not commence pension payments until retirement. For those who remained employed beyond NRA, many plans provided an actuarial increase for the entire period until payment commencement, ensuring that the economic value earned as of the NRA wouldn’t be lost — but many others provided no actuarial increase. Without an actuarial adjustment the decrease in the economic value from delaying retirement could be very significant, especially where the benefit amount was frozen.

In the late-1980s Congress started requiring in-service distributions once a participant reached the April 1 following the age 70½ calendar year. For a DB plan with an age 65 NRA that didn’t provided a late commencement adjustment, this requirement limited the potential loss in value from working past NRA to about six or seven years’ worth of pension payments.

The requirement was repealed for non-5% owners in the early 2000s. But if a DB plan took advantage of the repeal it would have to actuarially increase the accrued benefit at least for the period after in-service distributions would have had to begin under the prior law — the period after the April 1 following the age 70½ calendar year. In other words, Congress didn’t want this repeal to remove the limit it had placed on the potential loss in pension value from working past NRA.

From this perspective, it would be surprising if the current change from 70½ to 72 that applies to former employees and 5% owners was intended to also increase the allowed loss in value for non-owner participants still working past their NRA by another 18 months’ worth of pension payments.

[Peter Gulia]

Sellarsian, thank you for a helpful explanation.

BenefitsLink mavens, does this law make age 70½ the practical normal retirement age?

 

[Luke Bailey]

On ‎2‎/‎24‎/‎2020 at 7:26 AM, Peter Gulia said:

Sellarsian, thank you for a helpful explanation.

BenefitsLink mavens, does this law make age 70½ the practical normal retirement age?

 

I don't know about that, Peter, but I do want to remark that when I read the SECURE Act I assumed this was not a glitch at all. They wanted to delay RMDs, not reduce benefits for older workers. SECURE Act, not UN-SECURE.