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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
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
• In a DC plan, the accrued benefit is the balance of the
participant’s account
• Accrual rate versus accrued benefit
• Valuation required annually
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
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
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
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
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
– The 3% method
– The 133⅓ rule
– The fractional rule
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
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?