What is protected when the benefit is based on social security covere

[Guest meggie]

I used to think that an active person's accrued benefit (1st and excess SSCC formula) could not decrease due to the increase in social security covered compensation. For example, I had thought that in no event could the current year's accrued benefit for an active person be less than last year's accrued, if FAE and CS remain unchanged. Just recently, it has been pointed out to me that that is not the case--that is to say, if FAE remains flat and credited service has already hit the maximum of, say 30 yrs, it is conceivable (and allowable) that an active person's accrued benefit computed a year ago would decrease a year later due to the update in the covered comp table. It was also pointed out to me that what cannot decrease is the benefit that would have been immediately distributable. In other words, the minimum retirement benefit payable today (if retired today) is the greater of the current amount based on the current covered comp table, service, FAE, and ERF if applicable vs. what would have been immediately distributed if retired a year earlier.

Does anyone dispute my "new" analysis?

[Guest]

The IRS agrees with your analysis. You need to look at a subtle change the IRS made to the vesting regulations in 1988. Look at old 1.411-4(a) "[n]onforfeitable rights are not considered to be forfeitable by reason of the fact that they may be reduced to take into account benefits which are provided under the Social Security Act or under any other Federal or State law and which are taken into account in determining plan benefits."

Now look at 1.411(a)-4T(a) (a temporary regulation). The above sentence does not appear and instead its says that "[n]onforfeitable rights are not considered to be forfeitable by reason of the fact that they may be reduced as allowed under sections 401(a)(5) and 401(l)." Thus, unless you comply in total with the permitted disparity rules, an emloyee's benefit cannot decrease solely as a result of an increase in covered compensation. In addition, the language poses problems for those plans that reduce pensions by an employee's workers compensation benefits.

Interesting issue that many practioners fail to focus on . . .

[Guest meggie]

Follow-up question to the last respondent---- Are you saying that as long as the DB accrued benefit formula is in full compliance with 401(l),the accrued benefit for an active person may be reduced due to the update in SS covered compensation? Otherwise,if not in full compliance, then there is a violation of 411(d)? I did dig up some EA graybook responses by the IRS dated in 1990 and 1992 (Q&A 3 and Q&A 25, respectively) which seemed to confirm my original (old) analysis- that a covered comp related accrued benefit can not be reduced due to increase in covered compensation---hence my confusion!!

[Guest Brian4]

On September 3, 1993 the Treasury Department said the following in the preamble to the final permitted disparity regulations. Note this is more current than the gray book q&a meggie mentioned. So, the Treasury Department appears to be reserving the matter for potential future regulations.

3. RELATIONSHIP TO OTHER REQUIREMENTS

The regulations provide that compliance with section 401(l) does not allow a plan to decrease any employee's accrued benefit in violation of section 411(d)(6) and section 411(B)(l)(G). Commentators requested removal of the reference in the proposed regulations to an increase in covered compensation as an example of a decrease in accrued benefit. They believe section 411 does not prohibit a decrease in accrued benefit resulting solely from an increase in covered compensation.

After considering the comments, the Treasury and the Service have determined that the regulations under section 401(l) are not the proper vehicle for addressing the correct application of section 411 to this situation. Accordingly, the reference to an increase in covered compensation has been removed from the regulations, but no inference should be drawn from this revision as to the correct interpretation of section 411.