accruals reduced going forward

Hi,

A DB plan had a benefit formula of 6% per yr of participation for the first year of the plan. Now for the second year (take over for second year ) we want to use 3% for each year of participation (of course with 204(h) notice). 

However, we want the accrual for this second year to be 3% of comp for this year of participation, without reducing the current accrual due to the benefits earned for the first year. Meaning the total benefit at the end of the second year will be the 6% of comp accrual for the first year plus the 3% of comp accrual for the second year equals the total accrued benefit earned for the first two years.

Based on this, would the following be an appropriate language for the plan document as the plan benefit formula. For 12/31/2021 year 6% of avearge comp and for 12/31/2022 and going forward 3% of avg comp, WITHOUT WEARAWAY.   Thank you for any insights on this.

That sounds correct. It looks like you are using a fresh start date of 12/31/2021 and a formula without wear-away (sum of the frozen as of fresh start plus benefits accrued after the fresh start).

1 hour ago, Lou S. said:

That sounds correct. It looks like you are using a fresh start date of 12/31/2021 and a formula without wear-away (sum of the frozen as of fresh start plus benefits accrued after the fresh start).

Yes, that is indeed what we are doing. Thank you very much. Also, do we have to spell out what the actual formula was prior to the fresh start date? 

No you do not for the document. Make sure to put in the fresh start date and the new formula p,us any other requirements that your document may have.

Are you making this change for the plan year ending 12/31/2021? If so and you have the usual 1,000 hour accrual rule, I would guess it’s too late to change the accrual for 2021 for anyone with 1,000 hours. What am I missing?

26 minutes ago, Tedterrific said:

Are you making this change for the plan year ending 12/31/2021? If so and you have the usual 1,000 hour accrual rule, I would guess it’s too late to change the accrual for 2021 for anyone with 1,000 hours. What am I missing?

They are talking about making the change prospectively for the 2022 year and forward with fresh start date of 12/31/2021.

22 hours ago, Lou S. said:

They are talking about making the change prospectively for the 2022 year and forward with fresh start date of 12/31/2021.

Correct. 

FWIW, in 4 decades, I have never seen the word "wearaway" used in a plan document or amendment.  That's not to say such use is incorrect, just surprising to me.

1 hour ago, david rigby said:

FWIW, in 4 decades, I have never seen the word "wearaway" used in a plan document or amendment.  That's not to say such use is incorrect, just surprising to me.

We use a Corbel (I guess now FIS) document and it specifically uses the terms "with wear-away", "without wear-away" and "with extended wear-away". It parenthetically explains each term.

My two cents is the term wear-away (or whatever you end up calling it) should clearly be defined in the plan document so anyone can understand it's intended meaning.  But with that said I have seen many summary plan descriptions where there is a certain benefit formula up to xx/xx/xxxx or up to xx years of service and then a second formula (which could be an increased accrual rate or a decreased accrual rate) for all years after the cut-off.  Some say to lump it all together for the final benefit and some do not to avoid wear-away.

1 hour ago, JM said:

My two cents is the term wear-away (or whatever you end up calling it) should clearly be defined in the plan document so anyone can understand it's intended meaning.  But with that said I have seen many summary plan descriptions where there is a certain benefit formula up to xx/xx/xxxx or up to xx years of service and then a second formula (which could be an increased accrual rate or a decreased accrual rate) for all years after the cut-off.  Some say to lump it all together for the final benefit and some do not to avoid wear-away.

JM thank you. Your insight and time as always is appreciated. As an aside, the term wear-away is an actual term. The below is from the Cornell law school site:

(4) Fresh-start formulas -

(i) Formula without wear-away. An employee's accrued benefit under the plan is equal to the sum of -

(A) The employee's frozen accrued benefit; and

(B) The employee's accrued benefit determined under the formula applicable to benefit accruals in the current plan year (current formula) as applied to the employee's years of service after the fresh-start date.

(ii) Formula with wear-away. An employee's accrued benefit under the plan is equal to the greater of -

(A) The employee's frozen accrued benefit; or

(B) The employee's accrued benefit determined under the current formula as applied to the employee's total years of service (before and after the fresh-start date) taken into account under the current formula.

Thanks SSRRS!  Also, check out §1.411(d)-4 and §411(d)(6) on what is protected and what is not regarding various types of benefits.