Download Accrued Benefit Requirements

Accrued Benefit Requirements
Fundamentals I of Retirement Plan Issues
Chapter Six
Requirements of IRC §411(b)
• Concept of “accrued benefit” tied in with
vesting requirements
• Annual allocations for DC plans, versus
accrued benefits for DB plans
• Possibility of discrimination with a DB’s plan
AB formula
2
Definition of an Accrued Benefit
• In a DB plan, the accrued benefit (AB) is a formula defined
under the plan, in the form of an annual life annuity or joint
and survivor annuity, payable as of the normal retirement age
(NRA)
• In a DC plan, the accrued benefit is the balance of the
participant’s account
• Accrual rate versus accrued benefit
• Valuation required annually
3
Accrual Computation Period
• A year of participation = 12-consecutive period, measured
beginning with the date the employee becomes a participant
• Generally the 12-month period is the plan year (PY)
• Generally all years of participation are counted for benefit
accrual purposes
• A plan may require more than 1,000 hours of service for a
year of participant, but a pro rata amount must be extended if
the participant has at least 1,000 hours
4
Accrued Benefits under a DC Plan
• AB under a DC Plan = cumulative account balance
• If the DC plan permits employee and employer contributions,
separate accounts need not be made, but must be determined for
vesting purposes
•
Allocation may be conditioned on a required number of hours
during the PY and/or employment as of the end of the PY
• Accruals under DC plans are generally a percentage of the
participant’s compensation and unrelated to the participant’s age
5
Anti-cutback in Accrued Benefits
• An issue arises if the employer wishes to amend the DC’s
allocation formula after the end of the plan year, retroactively
for the prior plan year
• Another issues arises if the employer wishes to amend the
DC’s allocation formula retroactively for terminated
participants; this issue arises in the case where the plan’s
valuation date is retroactively altered
6
Accrued Benefits under DB Plans
• Like the NRB which is a benefit determined at retirement as
an annuity, commencing as of the NRA, the AB must be
defined as a cumulative benefit (based on current years of
participation) as an annuity, commencing as of the NRA
• If the AB is determined under the plan as of an age other than
NRA, the actuarial equivalent of such benefit must be
determined as of the plan’s NRA
7
Anti-Backloading Tests of IRC §411(b)
•
The Code does not require uniform accrual rates under the
DB’s AB formula; however the Code does not want excessive
backloading in the accrual rates as such result would defeat
the vesting rules.
•
Hence the accrual rate under the plan’s AB formula must
satisfy one (and only one) of the three tests set forth in IRC
§411(b)
– The 3% method
– The 133⅓ rule
– The fractional rule
8
Top Heavy Minimum Accruals
•
If a qualified DC plan is top heavy, IRC §416(i) requires a
minimum allocation equal to the lesser of 3% × compensation
or the maximum allocation accrued by any key employee
•
If a qualified DB plan is top heavy, IRC §416(i) requires a
minimum benefit for each year in which the plan is top heavy
equal to the lesser of 2% × his/her vesting year, or 20%,
applied to FAE
9
Anti-Cutback in Accrued Benefits
•
The rules of ERISA §204(g) and IRC §411(d)(6) protect an
existing participant’s AB from being retroactively reduced
through a plan amendment.
•
What is a plan amendment?
•
What is a reduction in the AB?
•
What is included in the AB that is being protected?
•
Are subsidies also protected? Optional forms?
1