Time to update NRA?

[Riley Britton]

I think it's time for plan documents to update the NRA to something more realistic....such as 66 1/2,  to be more in line with social security retirement ages. 

[C. B. Zeller]

This would require a change in the law, as age 65 comes out of IRC 401(a)(14).

Since you posted this on the 401(k) forum, what would be the practical effect of the change for a 401(k) plan? Normal retirement age doesn't really mean much in a 401(k) plan.

[Peter Gulia]

From my experiences with many individual-account retirement plans, I remember no situation in which attaining the plan’s normal retirement age entitled a participant to vesting or a distribution to which she was not otherwise entitled under the plan.

But such a situation is possible.

How often does it happen?  In what kinds of circumstances?

Are there kinds of employers or occupations for which it’s more likely to happen?

Are there kinds of plan designs in which it’s more likely to happen?

[C. B. Zeller]

The only type of DC plan that I can think of that would be impacted by a change in the NRA would be a target benefit plan, and those types of designs are quite rare.

In a typical profit sharing plan, the plan's definition of NRA really only ever comes into play when a participant who is less than fully vested in employer contributions attains normal retirement age and becomes fully vested as a result. Since NRA can be defined as the later of age 65 and 5 years of plan participation, and the longest permissible vesting schedule in a DC plan is 6 years, it is rare for this to occur. But it does happen sometimes, usually either because a participant failed to work enough hours each year to earn a year of vesting service, or because a participant who terminated employment delayed their distribution until NRA.

[Peter Gulia]

Thanks.

And for a participant whose benefit became non-forfeitable long before normal retirement age, how many plans do not allow a distribution, even after severance-from-employment or age 59½ (or both), until the participant attains normal retirement age?

 

[Bird]

21 hours ago, C. B. Zeller said:

Since NRA can be defined as the later of age 65 and 5 years of plan participation, and the longest permissible vesting schedule in a DC plan is 6 years, it is rare for this to occur. But it does happen sometimes, usually either because a participant failed to work enough hours each year to earn a year of vesting service, or because a participant who terminated employment delayed their distribution until NRA.

Or the plan simply says NRA = 65 without a years of participation requirement.  And, correct me if I'm wrong, but I think participants have to be employed at NRA to get full vesting; i.e. they can't simply delay the distribution and become vested when they reach NRA if not employed.

Anyway, I see the idea of changing NRA to be more in line with SSRA to be a non-starter.

[CuseFan]

The only other impact of NRA in a DCP is that many times the hours and last day requirements for a PS allocation are waived for retirement.

It's more relevant to a DBP discussion, but regardless, it would as CBZ said require a law change. Furthermore, couldn't see it applying to existing participants, which would mean tracking different NRAs for different populations - not a big deal for safe harbor formula plans, but how many DBP with such are still open to new entrants? I don't even want to think about trying to cross-test such a situation.

But this doesn't look to be on any legislative radar that I've seen and IRS (and/or Congress) couldn't even get their act together in coordinating actuarial increases (still 70 1/2) with the new RBD age 72.

[C. B. Zeller]

On 3/15/2021 at 9:04 AM, Bird said:

Or the plan simply says NRA = 65 without a years of participation requirement.  And, correct me if I'm wrong, but I think participants have to be employed at NRA to get full vesting; i.e. they can't simply delay the distribution and become vested when they reach NRA if not employed.

Anyway, I see the idea of changing NRA to be more in line with SSRA to be a non-starter.

Sure, you're allowed to have an earlier NRA than the latest allowed by law. But we're contemplating making the latest age later, which would only be of interest to plans that want to use the latest possible NRA.

I don't know about the employee thing. This is what IRC 411(a) says:

Quote

A trust shall not constitute a qualified trust under section 401(a) unless the plan of which such trust is a part provides that an employee's right to his normal retirement benefit is nonforfeitable upon the attainment of normal retirement age (as defined in paragraph (8))

and 411(a)(8)

Quote

( 8 ) Normal retirement age

For purposes of this section, the term "normal retirement age" means the earlier of—

(A) the time a plan participant attains normal retirement age under the plan, or

(B) the later of—

(i) the time a plan participant attains age 65, or

(ii) the 5th anniversary of the time a plan participant commenced participation in the plan.

Says nothing about being an employee on the date they attain normal retirement age. I also don't see anything to that effect in the 411 regs. I would be happy to be proven wrong though. The way I read this, a participant who defers their distribution (and is eligible to do so, i.e. not subject to mandatory cash-out) until NRA becomes 100% vested.

Interestingly, though, our plan document (FT William cycle 3 401(k)) only says that "a Participant shall become fully (100%) vested upon his attainment of Normal Retirement Age while an Employee." 

[Patricia Neal Jensen]

Have difficulty in most of our 403(b) plans thinking of a situation in which NRA does something necessary or important.  Unless client hires someone within an age range close to and the plan vests 100% at NRA.

 

[Bird]

3 hours ago, C. B. Zeller said:

Interestingly, though, our plan document (FT William cycle 3 401(k)) only says that "a Participant shall become fully (100%) vested upon his attainment of Normal Retirement Age while an Employee." 

That's exactly what I was looking at when I posted.  I assumed that was allowable; maybe I'll ask them.

[SusanKD]

If a participant leaves employment at age 50, the vested account balance is greater than $5,000 and the vesting is 80% , after a 5 year break in service, the non-vested balance is forfeited. The forfeited balance wouldn't be returned to the account when age 65 is reached. So how can a terminated participant who left employment and isn't fully vested prior to age 65, receive full vesting?

[chc93]

I skimmed through a few attorney-drafted plan documents we work with, and all of them require attainment of normal retirement age, death, or disability while still an Employee for 100% vesting.

[Bird]

18 hours ago, Bird said:

That's exactly what I was looking at when I posted.  I assumed that was allowable; maybe I'll ask them.

They confirmed that that was their interpretation and referred me to an (unhelpful) IRA website.