Alleged Fraudulant Social Security Offset Plan

[Gary]

A plan provides a gross accd ben of 1.5% of FAP * CS (unreduced at age 62),

and an offset of 2/3 of the age 62 soc sec benefit.

Clearly a short service employee based on the formula above could have an offset larger than the gross benefit.

This seems ridiculous.

However, we don't see too many SS offset plans nowadays and I'm not sure of the restrictions. I've seen things like limited to 50% of gross benefit, prorations for service/proj svc, etc.

The Plan also says eff 1/1/89, the offset shall not be greater than what is allowed by law. My first reaction is that that means no more than say the 0.75% of cov comp per year, with adjustments for commencement prior to SSRA and differing SSR ages.

Any thoughts on what is specifically in violation w/r/t this formula and more importantly how this can be researched in greater detail.

Of course my understanding is that a plan need not pass integration to pass non discrimination, but this seems a bit out of hand.

PS this is a company that is a railroad company and I don't know if that is relevant in this situation.

Look forward to getting help.

[david rigby]

I'm not sure of the details in this case, but we should not be surprised that a short service employee has a small benefit.

IRC 401(l) defines the safe harbor rules for social security integration. If the plan is not safe harbor, its non-discrimination is tested under 401(a)(4).

We don't see many offset plans for several reasons, such as:

1. Perception as a "takeaway".

2. More difficult to communicate and administer.

3. Under safe harbor rules, an offset is essentially an algebraic manipulation of an excess plan. Many plan sponsors and consultants take the position, "why bother."

[Gary]

pax,

I understand what you're saying. My point is that what happenned in my example was that this person essentially accrued a benefit of 0 in 6 yrs of svc. 1.5% of FAP*6 does not accululate to too much and that makes sense. But to have a benefit of 0 (except they provide a minimum benefit of $ 100 per YEAR). Clearly doesn't seem large enough to have any impact w/r/t 401(a)(4). So my point is, something seems wrong with an offset of 2/3 of SSB, that does not prorate for service. They do have in their provisions that the SSB is based on COmp while employed by the Co., but they didn't apply it that way. So I still wnat to address the 2/3 SSB on its own merits. And the post 1989 disparity minimum requirements (which it doesn't seem to meet and is stated as a requirement in the PLan). Of course we know that 401(l) can fail and still pass 401(a)(4). But the formula doesn't seem to pass 401(a)(4) and doesn't meet the apparent minimum 401 (l) post 1989 requirements. Look forward to your thoughts.

gary

[david rigby]

"...the SSB is based on Comp while employed by the Co., but they didn't apply it that way...."

Interesting. You seem to be stating that the plan sponsor did not determine the benefit according to the terms of the plan. That is usually a problem.

Also, you state that "...the formula doesn't seem to pass 401(a)(4)". Well, I agree that it may look that way, but you still have to test it to know for sure. Has it been tested? If so, has there been any auditor or other review? Especially make sure that the HCEs have been correctly identified.

[Guest Brian4]

The plan says the offset shall not be greater than what is allowed by law. This sounds vague - what law(s) and regulation(s) does it refer to?

Under pax's first reply, I interpret point number three about offset plans being algebraic manipulation of excess plans to refer to covered compensation type excess plans. Social Security primary insurance amount offset plans produce different benefits.

"... this person essentially accrued a benefit of zero in 6 years of service." This makes me question if the benefit formula complies with the benefit accrual rules that limit the amount of backloading. Many years ago, the IRS has issued guidance saying some social security offset formulas do not comply with these rules. How is the offset calculated and applied in this plan? What would the projected benefit be at normal retirement age under the plan, and how does the amount accrued in six years relate to the projected benefit, and how many years are projected to normal retirement age?

Special rules apply when employees are covered by the railroad retirement plan. Check Treasury Regulations for 401(l).

[Gary]

The Plan says "Effective 1/1/89, the max SS offset allowed for any year of service will be the lesser of the 1)the max offset permitted by law or 2) the specified Plan offset".

I believe that would have to do w/ the .75% per year or no more than 50% of gross benefit (although I am not sure if this part is in 401(l)).

This person terminated at age 32 with a lump sum that was based on the gross benefit payable from age 60 to 62 (at a reduced level) and then based on the net benefit (inclusive of offset) from 62 and beyond. The result was a benefit of 264 per month from 60 to 62 and a benefit of zero from age 62. But since they have a min ben of 100 per YEAR, that was the age 62 ben. This seems ridiculous, since if the lump sum were greater than 3,500 and the person was to take a normal ret ben at 65, she would receive zero,except for that trivial minimum benefit.

Look forward to further comments on such a benefit. Of course I don't know if being a railroad plan has any impact (as of yet).

Once again the formula is 1.5% FAP less 2/3 PIA (not prorated for service, which appears to be one flaw).

[david rigby]

Good point by Brian4 about the accrual rules. I wonder if we are missing some information. Gary, you state that the offset is not prorated for service. But what accrual rule is the plan using? For example, the plan may define a benefit formula (often in the "retirement" section of a document) but it will also have a definition of "accrued benefit" (usually in the definition section). My hunch is that definition is based on the fractional accrual rule.

[Gary]

Accrued Benefit is defined as "as of any date the retirement benefit under Article V"

The retirement benefit is 1.5% FAP * credited service less 2/3PIA (payable at age 62).

So it is clear that the gross benefit is a unit credit accrual and the offset is a flat benefit with NO service proration.

What do you think?

[david rigby]

I think it may fail IRC 411(B)(1).

Notice the paragraph at the very beginning of IRC 411(a).

Is this a qualified plan? Is there an SPD, even an old one? Any other samples of actual benefit calculations?

[Gary]

It's a qualified plan. A railroad company (Assuming they are qualified).

The SPD has same provision as in Plan.

And this is only calc. I have.

This calc has a gross age 62 pension of $300 per month based on 6 yrs CS and FAP of 40k (all approximations).

The offset is based on a SSRA PIA of 994, reduced for commencement at age 62, which comes out to approx 700 per month and then mult. by 2/3 and it produces a benefit less than zero.

Seems to fail 411(B), and I am wondering if it is an illegal offset prior to 1/1/89 and certainly doesn't appear to meet post 1/1/89 offset rules.

Any comments?

[david rigby]

I would say that this fails 411(B). The next step probably should include the advice of a competent ERISA attorney, preferably one who has been around since at least 1989.

[Guest Ted H Munice]

Interestingly, the plan's formula doesn't appear to meet the pre-'89 offset rules but could pass post-'89 general test (which points out how discriminatory 401(a)(4) actually is). I think it was TEFRA that mandated limitations on the offset. The plan wording about the offset not exceeding that permitted by law probably refers to the old TEFRA limits. Post-'89 the plan might pass under 401(a)(4) general test. It certainly won't pass the safe harbor. But I do not see how it passes either of the three benefit accrual rules under ERISA, even with the $100 minimum benefit. Plans of this type usually had a pro-rate accrual on the projected benefit. Did this plan ever get a determination ruling?

[Gary]

Don't know that it has received a determination letter. I would be surprised if they didn't.