Adding Years of Service

[Toy Cannon]

Under a defined benefit plan (pension), are there circumstances under which a non-profit employer may credit an Highly Compensated Employee (HCE) years of service toward the pension benefit?   For example, having reached 33 years of service, can they credit 7 YOS so when the employee reaches normal retirement age they receive the same amount they would have if they had worked the 7 years (excluding potential raises).  The reasoning would be it saving the company money by taking the higher salary off the books.

[Effen]

Yes, as long as you do it for everyone else.  In essence, you are just increasing the accrued benefit.  As long as the increase can satisfy the applicable non-discrimination rules, you can do it.  IOW, yes, but you can't do it if only HCEs would be eligible.  

[CuseFan]

What is the objective? Are they trying to enable this HCE to retire earlier than otherwise anticipated, and is this at normal retirement (where they otherwise expect the person to work beyond NRA) or an earlier age? Stuff like this is often done as part of an early retirement window, but an ERW has to be nondiscriminatory, you can't just do for this one HCE.

However, the plan could possibly be amended to increase this person's benefit to accomplish the objective provided the plan's benefits overall can (after the amendment) satisfy nondiscrimination testing. Depending on the plan's formula, you often need to also provide a minimum benefit for NHCEs to pass testing. We see this more in taxable entities than the NFP world.

[C. B. Zeller]

Since you mention the employee hasn't reached normal retirement age yet, we are presumably talking about an early retirement benefit? ERBs are a benefit, right or feature subject to nondiscriminatory availability requirements.

Like Effen said, as long as you make the same benefit available to all HCEs and non-HCEs alike, you should have no problem.

[Toy Cannon]

Thank you so much.  Exactly the information I was looking for.

[Toy Cannon]

This would have been meant for one employee who wanted to retire early, but actually not draw on their pension until NRA.  

Out of curiosity, how would this be different than companies giving an individual a  "Golden Handshake?."   Is it because those occur outside of a formal retirement plan?

[Lou S.]

1 hour ago, Toy Cannon said:

This would have been meant for one employee who wanted to retire early, but actually not draw on their pension until NRA.  

Out of curiosity, how would this be different than companies giving an individual a  "Golden Handshake?."   Is it because those occur outside of a formal retirement plan?

Qualified retirement plans need to comply with complex nondiscrimination  rules that don't often apply to payments outside the Plan.

If you're trying to do it for on Highly Compensation employee and no one else, it will not work with in the Plan as it would discriminate in favor of highly compensated employees.

It has to do with the tax advantage nature of qualified retirement plans.

[david rigby]

50 minutes ago, Lou S. said:

If you're trying to do it for on Highly Compensation employee and no one else, it will not work with in the Plan as it would discriminate in favor of HCEs.

Well, there are other things that could be discussed (eg, changing the rate of accrual, maybe) that could assist you.  CuseFan asks the correct question: what is the objective?  It's possible an Early Retirement Window could be available.  I recommend you discuss with the plan's actuary.  If the actuary does not have experience with an ERW, ask for a reference to someone else.

[Luke Bailey]

Toy Cannon, I would expand on Effen's answer to you to say that it is possible under complex rules to do it for less than all the employees, but you definitely cannot do it just for one highly compensated employee.