NRA in the document is 55

[Jakyasar]

Hi

Looking over a possible takeover DB plan. It is 2 years old.

It is for a law firm. 2 partners are in their late 40s and early 50s

The NRA is written as (I have not seen this before):

Later of age 55 and 5 YOP and 17 YOS. Maximum NRA is 65 and 5th anniversary of plan participation.

As this is not one of those special category of employers (like football players etc), how kosher is the way the definition is written?

If kosher, how would you calculate the funding requirements?

I would never use less than 62 but might be missing some allowance here.

Thank you

[truphao]

I will take a shot:

1) Regarding NRA - being at least 55 I do not feel too bad about it although probably not the best

2) Regarding the funding - as an actuary you should make reasonable assumptions regarding the expected retirement age.   The rest will follow.

I hope I am not oversimplifying.

 

[Jakyasar]

The issue with item 2 is, item 1 may not be reasonable and also, the law.

[truphao]

I am not sure I see the legal definition of NRA and the funding calculations as interrelated as you do.   For example, one of my clients is a relatively young successful MD.  I wrote the plan with NRA = 62 but we fund his plan based on the assumption he will be done at 50.  That is what he stated his objective is and I am comfortable operating his plan based on that assumption.

I definitely agree that 55 as NRA is not "kosher" but you did not provide the facts related to years of SVC - it might be that neither of those attorney can actually retire before 62?

 

 

[Jakyasar]

In my humble opinion, there is a difference on how you write the plan document vs how you operate/fund the plan (many factors play a role on the practicality of administration).

You can fund for age 62 but keep the funding under control with the assumption that you will pay out at 50. Afterall 404 allows a very big deduction limit after a few years of operation. All you have to do is keep an eye on the 415(b) limit at any possible payout age.

My concern is how you write it in the plan document and keep it kosher on paper. I always thought, one should not put in 55 as NRA (may be as an early RA) unlessw the industry standard is a lower RA.

Let's see if I opened the Pandora's Box here.

[Peter Gulia]

So we learn something together:

Imagine a defined-benefit pension plan provides a normal retirement age of 55.

Imagine the plan’s sponsor asserts that age “is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed[.]” 26 C.F.R. § 1.401(a)-1(b)(2)(iii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)-1#p-1.401(a)-1(b)(2)(iii).

May an actuary do her work assuming the plan-specified normal retirement age?

Or do professional standards require an actuary to make her own estimates about when the plan’s participants are likely to retire?

[truphao]

4 minutes ago, Jakyasar said:

My concern is how you write it in the plan document and keep it kosher on paper. I always thought, one should not put in 55 as NRA (may be as an early RA) unlessw the industry standard is a lower RA.

Agree, but I think there is a valid argument to be made that a successful high profile trial attorney can be expected to retire earlier than 62.  Yes, I am stretching but what I am trying to say is falls into "facts and circumstances" area.

 

6 minutes ago, Peter Gulia said:

Or do professional standards require an actuary to make her own estimates about when the plan’s participants are likely to retire?

I strongly feel that the answer is "yes".  For example, husband and wife run a successful real estate business (or mortgage company) together with the wife being 5 years younger.   Can I really assume they both would be working until their individual age 65 (as NRA being age 65 in the plan doc)?  Or do I assume (after learning that they want to be done when the husband is 65) that that is my assumed retirement date for both of them?

[C. B. Zeller]

truphao made an important distinction which I believe is frequently lost on DB plan practitioners.

A plan is required to define a normal retirement age, which is important for certain calculations under sec. 411 and other requirements under sec. 401. Reg. 1.401(a)-1 offers some guidelines for selecting a normal retirement age.

When doing funding calculations, an actuary has to make an assumption about when a participant will commence benefits. 1.430(d)-1(f)(3) requires that actuarial assumptions, other than those specified in law,  must be reasonable and must offer the actuary's best estimate of expected experience under the plan. Nowhere in that section or any other is there a requirement that the actuary assume that a participant will retire on the plan's normal retirement date. Indeed, if it would not be reasonable to assume that the participant will retire on the plan's normal retirement date, then the actuary may not make that assumption.

[CuseFan]

As noted - two separate issues: (1) NRA definition in plan document which has specific statutory requirements and (2) funding assumptions which must be reasonable.

For (1) - anything before age 62 must prove/satisfy typical industry standards, not expectations at the company level. If law firm partners typically retire at 62 or later, then 55 doesn't work even if the partners are 40 and said they don't plan on working past 55. Which, if that is the case, then 55 as the assumed retirement age for funding valuation is certainly reasonable.

I think you have troubling issue with the former here but not the latter.

[Jakyasar]

Yes, the troubling issue is with the document and not the calculations. IMHO, the document should not read 55, at least not for this sponsor. This is what I am asking for and nothing else.

I also agree with the fact that when calculations/funding are performed, many other factors have to come into play.

[mming]

I would much rather prefer the doc define NRA as at least age 62, even if the current NRAs for the partners is at least 62 using the definition the doc has at this time.   

[truphao]

On 1/14/2023 at 4:05 PM, Jakyasar said:

If kosher, how would you calculate the funding requirements?

I do not think anyone is disagreeing with age 62 per se, your original question was focused on funding and that is what stirred the pot for me .  I apologize for being a troublemaker.  

[Jakyasar]

Thank you for being troublemaker, opened up the conversation into a good one. I’m not always clear on what I ask

 If I decide to take over the case, I will amend the NRA to 62 in the document. Funding will be discussed with the client and adjusted accordingly.

Thank you all for your input.

[david rigby]

It's possible this is "overthinking".  Consider the use of an Early Retirement definition that addresses the needs of the plan sponsor.

[Jakyasar]

Hi David

That is something I am planning to bring to the client's attention if and when I am involved. But the document's NRA definition should be 62. Everything else can be calculated actuarially and separately. Besides, for a participant who is in their 50's and 60s, why have early retirement? Anything and everything can be easily accomplished actuarially with this age group.

Again, this is all about what needs to be in the plan document and not how the plan operates.

-----------------------------

Here is from my documents regarding selection of NRA

NOTE: The age selected must not be earlier than the earliest retirement age that is reasonably representative of the typical retirement age for the industry in which the plan participants work. Age 62 or older automatically meets this requirement.

Here is from my document if amending the NRA

NOTE: If the Normal Retirement Age was 55 or greater, and less than 62, the effective date must be after May 22, 2007, and no later than the first day of the first Plan year beginning after June 30, 2008. (I am also assuming that any plan started later in time should be aware of the requirements)

----------------------------

I am not sure how the IRS would react to an NRA definition/age of less than 62 as written in the document. To be honest, I have no experience in this area. I never use less than 62 and it is so much easier to deal with the earlier ages simply by making actuarial assumptions. Afterall, everything is limited to 415(b) at any given age.

Anyway, this is all I have to say. I may too rigid but in my opinion, unless proven otherwise for the industry standard, within the plan document, the NRA should not be less than 62 and I am sticking with it.

Thank you all.

[truphao]

Jakyasar, I am not a big expert on this but I would be concerned if amending NRA to 62 from whatever bizarre formula it were before would open another Pandora box.   Some questions I would be asking myself in your shoes:

1) Do I need to protect anything (anti-cutback)?

2) If I do, how would I do that?  Can the same be accomplished by changing another provisions? (vesting, eligibility, etc.)

3) How would I make clear to the client that prior years are still an issue, and that the client/prior actuary/whoever and not me is responsible?  Special language in Engagement Letter?

4) Anything else as I am sure I am not thinking of everything right now?

[david rigby]

43 minutes ago, Jakyasar said:

Everything else can be calculated actuarially and separately.

Maybe.  Does this plan provide a 415-maximum benefit?  If so, you are (probably) stuck with whatever the 415 regs apply for any commencement date prior to age 62.  But, if the benefit is less than the 415-maximum benefit, using an Early Retirement date AND a generous early retirement factor can be useful.  Example:  Early Retirement at 55/20 with an ER reduction factor of zero, might accomplish the original goal.  It's also prudent to know whether there are (or were) any other plans.

[Jakyasar]

1. Definitely yes, AE adjustment. Also a bit of administrative headache keeping track of multiple benefit structures at different NRAs but that is our job.

2. I do not think changing only other provisions can accomplish it, one has to look at overall structure. I did this quite a few times especially with enactment of PPA, cumbersome but doable.

3. Gently and not scaring the client, you just inform the client that you will need to make some changes to make the plan more manageable and more realistic (for a 60 year old owner) and that nothing will change. However, you need to find out if the client requested age 55 from a meeting with the prior TPA. If yes, you simply add it as an early retirement option. I will leave it to other to comment on the engagement letter issue. I am yet to decide to take case over but possibly for 2023.

4. I am sure more will come from the great minds of BL

[Jakyasar]

David, I agree with everything you are saying. I cannot yet comment on generosity requirement of the plan until I have a meeting with the prospective client. However, in this case, ERA of 55 for a 60 year old owner where the plan started 2 years ago, benefits primarily the rank&file younglings in the plan.