415 Limits--Distributions While Still Employed?

I work for a large employer with a DB plan which bases benefits on up to 45 years of service.  Our participants also seem to love their jobs too much to retire.  Therefore, we have several active participants (who are NOT highly-paid) who are over 70 1/2, continuing to work full-time, and whose accrued benefits have exceeded 415.  We have been advised by our attorneys that the appropriate way to handle this is to begin periodic payments, even though the participants continue to work.  This is a new concept for me and I think I missed a regulation change somewhere along the way.  With previous employers our practice was to stop accruals as necessary and make distributions from a non-qualified plan. to make the participants whole.  Can someone provide a little history on this and direct me to the appropriate regs?  Thank you!  

1.415(a)-1(f)(7)

(7) Effect on other requirements.— Except as provided in § 1.417(e)-1(d)(1), the application of section 415 does not relieve a plan from the obligation to satisfy other applicable qualification requirements. Accordingly, the terms of the plan must provide for the plan to satisfy section 415 as well as all other applicable requirements. For example, if a defined benefit plan has a normal retirement age of 62, and if a participant's benefit remains unchanged between the ages of 62 and 65 because of the application of the section 415(b)(1)(A) dollar limit, the plan satisfies the requirements of section 411 only if the plan either commences distribution of the participant's benefit at normal retirement age (without regard to severance from employment) or provides for a suspension of benefits at normal retirement age that satisfies the requirements of section 411(a)(3)(B) and 29 CFR 2530.203-3. Similarly, if the increase to a participant's benefit under a defined benefit plan in a year after the participant has attained normal retirement age is less than the actuarial increase to the participant's previously accrued benefit because of the application of the section 415(b)(1)(B) compensation limitation (which is not adjusted for commencement after age 65), the plan satisfies the requirements of section 411 only if the plan either commences distribution of the participant's benefit at normal retirement age (without regard to severance from employment) or provides for a suspension of benefits at normal retirement age that satisfies the requirements of section 411(a)(3)(B) and 29 CFR 2530.203-3.

Basically, hitting the 415 limit prohibits the required actuarial increasing of delayed benefits, which results in an impermissible forfeiture of benefits under the plan and therefore requires the commencement of benefits.

Plans that provide for suspension of benefits (and issue the required notices) can avoid actuarial increases for delayed commencement between NRA and age 70 1/2, but not after age 70 1/2.

Thanks to you both.  Was this really effective in 2007 and I missed it somehow?

I don't recall when it became effective but do know it's been that way for a while, so 2007 wouldn't surprise me.

April 5, 2007

I have a similar situation, but for a former participant who is not at Normal Retirement Age.

The participant is now a terminated vested participant, only 37 years old.  This is a Cash Balance plan, and she was accruing a significant benefit, just under her 415 limit.  Well, the unexpected happened, and she terminated.  Her 415 limit from one year to the next declined, now chopping her previously accrued benefit by around $11K.  

I'm thinking this is a case where automatic commencement is required so she receives her entitled benefit.  

Is this cutback permissible, or does this fall under an impermissible forfeiture of benefits?

Did the maximum lump sum drop do to interest rate changes or did the accrued monthly benefit payable drop?

Her Hypothetical Account Balance from 2023 to 2024 did not decrease, I suppose, but she can't be distributed all of it now (unless reemployed, which I doubt will happen given the circumstances that were shared with me). 

Her compensation limit from 2023 to 2024 remains at $20K.  The decrease in the maximum lump sum limit is coming from her being a year older (different factors being used in the calculation from last year to this year), and also the change in mortality from 2023 to 2024.

In years past, her Hypothetical Account Balance was under the maximum lump sum limit, but now her maximum lump sum limit is less than her previously accrued Hypothetical Account Balance. The normal form of payment is the lump sum equal to the account balance.  Since the maximum lump sum limit has now declined, and Single Life Annuity would be calculated based on the lump sum amount, the Single Life Annuity available to her has decreased from 2023 to 2024.

The amount of annuity room "used up" in the conversion is done at the 415 rates, not the 417 rates.

Otherwise someone could bifurcate and suggest they get the lump sum for an annuity portion (calculating under 417 to the same number as the full 415 limit would have) and then also expect an annuity stream for the difference.