Normal Retirement Age Accelerated Vesting; Anniversary Contrasted to Years of Service as the Impetus

[Kent Allard]

From § 411(a)(8)

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.

____________________________________________________________________________________________________________________________________________________________________

The reference to the "5th anniversary" might seem ambiguous as to whether the accumulation or providing of five (5) years of vesting service/service otherwise might affect the situation. Guidance would seem to suggest the anniversary applies unaffected by the providing of a particular metric of years of service, vesting or otherwise.

To consult extensive guidance on this situation: 

URL: https://www.ecfr.gov/current/title-26/part-1/section-1.411(a)-7#p-1.411(a)-7(b)(1)(ii)

Citation: 26 CFR § 1.411(a)-7(b)(1)(ii)

For purposes of paragraph (b)(1)(ii)(B) of this section, participation commences on the first day of the first year in which the participant commenced his participation in the plan, except that years which may be disregarded under section 410(a)(5)(D) may be disregarded in determining when participation commenced.

https://uscode.house.gov/view.xhtml?req=(title:26 section:410 edition:prelim) OR (granuleid:USC-prelim-title26-section410)&f=treesort&edition=prelim&num=0&jumpTo=true#substructure-location_a_5_D

[T]he number of consecutive 1-year breaks in service within such period equals or exceeds the greater of-

(I) 5, or

(II) the aggregate number of years of service before such period.

(ii) Years of service not taken into account
If any years of service are not required to be taken into account by reason of a period of breaks in service to which clause (i) applies, such years of service shall not be taken into account in applying clause (i) to a subsequent period of breaks in service.

_______________________________________________________________________________________________________________________________________________________________________

Revenue Ruling 84-69

Internal Revenue Service

1984-1 C.B. 125

26 CFR 1.411(a)-1: Minimum vesting stand­ards; general rules.

 
Qualification; effect of plan lan­guage on the vested accrued benefit at normal retirement age. A plan that limits an employee's right to nonforfeitable benefits to amounts in which the employee already has a nonforfeitable interest pursuant to the plan's vesting schedule does not satisfy the requirements of section 411 (a) of the Code.

Rev. Rul. 84-69

ISSUE

Does the retirement plan described below satisfy the minimum vesting provisions of section 411 of the Inter­nal Revenue Code?

FACTS

An employer maintains a noncon­tributory retirement plan which in­cludes a vesting schedule under which an employee who has at least 10 years of service has a nonforfeitable right to 100 percent of his accrued benefit. The vesting schedule satisfies the re­quirements of the section 411 (a)(2)(A) of the Code. In addition, the plan provides that an employee's right to the normal retirement benefit under the plan is nonforfeitable upon attainment of the normal retirement age (which the plan defines as age 65). Other plan language defines the term normal retirement benefit as the por­tion of the employee's accrued bene­fit determined under the plan's vest­ing schedule to be nonforfeitable. As a result, employees hired after age 55 who retire at normal retirement age are not entitled to any retirement benefit.

LAW AND ANALYSIS

Section 401(a)(7) of the Code pro­vides that a plan shall not be a quali­fied plan under section 401(a) unless it satisfies the requirements of section 411.

Section 411(a)(2)(A), (B), and (C) of the Code provide vesting sched­ules, one of which must be satisfied in order to satisfy the requirements of section 411. In addition, the introduc­tory language of section 411(a) re­quires that an employee's right to a normal retirement benefit be nonfor­feitable upon attainment of normal retirement age.

Section 411(a)(9) of the Code de­fines the term normal retirement benefit as the greater of the early re­tirement benefit or the benefit under the plan commencing at normal re­tirement age.

Section 411(a)(7) of the Code de­fines accrued benefit in general as (1) in the case of a defined benefit plan, the benefit determined under the plan expressed as an annual benefit com­mencing at normal retirement age or (2) in the case of any other plan, the balance of the employee's account.

For purposes of section 411 of the Code, the term normal retirement benefit means the individual's ac­crued benefit, determined without re­gard to whether such benefit is vested. Thus, for a plan to satisfy the requirements of section 411, an em­ployee participating in the plan at normal retirement age must have a nonforfeitable right to 100 percent of the employee's accrued benefit ir­respective of whether some portion of such accrued benefit would otherwise be forfeitable under the plan's vesting schedule. See Caterpillar Tractor Co. v. Commissioner , 72 T.C. 1088 (1979).

HOLDING

Because the plan in this case limits an employee's right to nonforfeitable benefits to amounts in which the em­ployee already has a nonforfeitable interest pursuant to the plan's vesting schedule, the plan does not satisfy the requirements of section 411 (a) of the Code.

_____________________________________________________________________________________________________________________________________________________________________________________

The Tax Court has reached the same conclusion in interpreting a substantially identical counterpart provision in the Internal Revenue Code, 26 U.S.C. § 411(a) (1976). See Trustees of the Taxicab Industry Pension Fund v. Commissioner, 1981 T.C.M. (CCH) P 651; Board of Trustees of New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund v. Commissioner, 1981 T.C.M. (CCH) P 597; Caterpillar Tractor Co. v. Commissioner, 72 T.C. 1088 (1979)

https://www.courtlistener.com/opinion/409644/clara-duchow-individually-and-as-administratrix-of-the-estate-of-herman/authorities/

https://www.upi.com/Archives/1983/05/02/The-Supreme-Court-refused-Monday-to-take-up-a/6200420696000/

[C. B. Zeller]

Is there a question here?

[david rigby]

Did someone just author a treatise?

[Kent Allard]

While perhaps serving as other to the locus classicus on this situation, the veracity of the presentation above would proceed as bolstered by evaluation on this board.

The proviso of "participation commences on the first day of the first year in which the participant commenced his participation in the plan..." does seem to suggest the mere passage of the interval described affects the situation, with the amount of accumulated service for vesting/eligibility/benefit accrual/allocation(s) inapplicable. If the normal retirement date served to the slightest extent as a function of accumulated service, the reckoning of the commencement of participation would seem perhaps odd. 

The inquiry for this post:

Unhelpfully, 26 CFR § 1.411(a)-7(b)(1)(ii) seems to use the word "year" lacking any consideration of plan years occurring as other to routine calendar years ending on December 31 (12/31). If further guidance has supplied how the situation proceeds mutatis mutandis for plan years calibrated other to December 31 (12/31) ends, please provide the references for said guidance. 

 

[Bill Presson]

Kent, 

TLDR because Dave and Ms Lois don't pay me enough to read and answer or even figure out what the question is.

[C. B. Zeller]

If I'm understanding correctly, the question is this:

Say a plan provides that the normal retirement date is the later of attainment of age 65, or the 5th anniversary of the first day of the year in which the participant commenced participation in the plan. Is the "year" in this case the plan year, calendar year, participant's anniversary year, or something else?

Kent has obliquely observed that the "year" for this purpose is not defined in the IRS regulations or other guidance.

However, regulations relating to computation periods for purposes of IRC sections 410 and 411 (as well as ERISA 202, 203 and 204) are under the authority of the DOL. 

DOL reg 2530.200b-1 notes that "Under sections 202, 203 and 204 of the Act and sections 410 and 411 of the Code, an employee's statutory entitlements with regard to participation, vesting and benefit accrual are generally determined by reference to years of service and years of participation completed by the employee and one-year breaks in service incurred by the employee."

I note the use of the word "generally" because in this instance, the employee's right to vesting is not based on the hours definitions of years of service or participation. However a computation period still applies, because the 5 year period must be measured somehow.

DOL reg 2530.203-2 defines the computation period for vesting purposes, i.e. for purposes of ERISA 203 and IRC 411. Paragraph (a) reads:

Quote

(a) Designation of vesting computation periods. Except as provided in paragraph (b) of this section, a plan may designate any 12-consecutive-month period as the vesting computation period. The period so designated must apply equally to all participants. This requirement may be satisfied even though the actual 12-consecutive-month periods are not the same for all employees (e.g., if the designated vesting computation period is the 12-consecutive-month period beginning on an employee's employment commencement date and anniversaries of that date). The plan is prohibited, however, from using any period that would result in artificial postponement of vesting credit, such as a period meassured by anniversaries of the date four months following the employment commencement date.

From this I would conclude that whichever 12-month period the plan designates as the vesting computation period would also be the "year" used to measure the 5th anniversary of participation for determining the normal retirement date.

Kent, if this analysis was helpful to you at all, I would love to get a verbose thank-you note written in your signature flowery and archaic style! It would really make my day.

[ratherbereading]

Oy! My head hurts! 

 

[Bill Presson]

21 hours ago, ratherbereading said:

Oy! My head hurts! 

 

More like "rathernotbereading" now, amirite? 😇

[ratherbereading]

On 2/21/2025 at 12:52 PM, Bill Presson said:

More like "rathernotbereading" now, amirite? 😇

Lol, yep! 

[Kent Allard]

C. B. Zeller, I appreciate your reply. 

Perhaps only slightly connected to the situation, while perhaps worth mentioning here, a further Revenue Ruling on normal retirement age/date: 

Revenue Ruling 81-211

Internal Revenue Service

1981-2 C.B. 98

http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irla46c/1/doc

Advice has been requested whether the pension plan described below satis­fies the requirement of section 411(a) of the Internal Revenue Code, that an employee's right to the normal retire­ment benefit is nonforfeitable upon at­tainment of normal retirement age.

A pension plan provides that an em­ployee's right to the normal retirement benefit under the plan is nonforfeit­able at the normal retirement date. The normal retirement date is the first day of the calendar month following the date on which the employee attains age 65.

Section 401(a)(7) of the Code pro­vides that a plan shall not be a quali­fied plan under section 401(a) unless it satisfies the requirements of section 411.

Section 411(a) of the Code requires that an employee's right to the normal retirement benefit under the plan must be nonforfeitable upon the at­tainment of normal retirement age as defined in section 411(a)(8). Section 411(a)(8) provides that normal retire­ment age means the earlier of: (a) the normal retirement age under the plan, or (b) the later of age 65 or the tenth anniversary of the time participation commenced.

In this case, an employee's right to the normal retirement benefit be­comes nonforfeitable on the em­ployee's normal retirement date, which will occur from one day to one month after the date the employee at­tains age 65. However, the normal re­tirement date may not occur until after the employee's normal retire­ment age as defined in section 411(a)(8) of the Code.

Accordingly, the pension plan does not satisfy the requirement of section 411(a) of the Code, that the em­ployee's normal retirement benefit be nonforfeitable at normal retirement age. Therefore, the plan is not quali­fied under section 401(a).
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Intervening amendments have the reference to the tenth (10th) anniversary as reduced to the fifth (5th) anniversary. 

Seemingly the conclusion directs the normal retirement date, which might mark from when distributions may proceed, may occur subsequent to the normal retirement age provided all of the amounts have vested as of the normal retirement age.  

"However, the normal re­tirement date may not occur until after the employee's normal retire­ment age as defined in section 411(a)(8) of the Code" seems an unanticipated way to express this notion. Perhaps more expansively, removing the confusing conjunction "until", the intent seems: "However, unless all of the amounts have vested ahead of the normal retirement date, the normal re­tirement date may not occur after the employee's normal retire­ment age as defined in section 411(a)(8) of the Code".