It is apparent from the extensive investigation of defined benefit plans on the part of the US Department of Labor (DOL) that the DOL is quite focused on timely payment of plan benefits to participants. The DOL is interested not only in when benefits begin, but in how a participant is made whole when benefits begin after normal retirement age. A defined benefit plan must generally increase a normal retirement benefit actuarially where payment begins after a participant’s normal retirement age. The Internal Revenue Code (Code) and underlying regulations, however, allow a plan to pay instead the normal retirement benefit amount plus make-up payments in some instances. In light of the DOL’s scrutiny in this area, it may be wise for plan sponsors to review pertinent plan provisions and operation to make sure they comply with applicable rules.
Section 411(c)(3) of the Code provides that where a participant’s benefit under a defined benefit plan is to be determined as an amount beginning on a date later than the participant’s normal retirement age, the benefit must be actuarially increased.
There is an exception to this rule where a participant remains employed after his normal retirement age, and the plan contains and properly administers a suspension of benefits provision under Section 411(a)(3)(B) of the Code and Section 203(a)(3)(B) of ERISA and its underlying regulations. A suspension of benefits provision allows a plan to refrain from paying normal retirement benefits during certain periods of employment (called “Section 203(a)(3)(B) Service”) and/or to discontinue payment of normal retirement benefits to retirees who return to Section 203(a)(3)(B) Service. Section 203(a)(3)(B) Service is, under a single employer plan, any month or four- or five-week payroll period after normal retirement age during which an employee completes 40 or more hours of service or receives payment for hours of service performed on eight or more days in such month or payroll period. Treasury Regulations § 1.411(c)-1(f)(1) provides that no actuarial increase is required for periods of suspension of benefits.
Treasury Regulations § 1.401(a)-14(d) provides some relief from the Section 411(c)(3) actuarial increase requirement where benefit payment is unavoidably delayed. If a participant’s benefit is to be paid by default under Section 401(a)(14) of the Code or in accordance with the participant’s election, and the benefit cannot be ascertained by the payment date or the participant cannot be located by the payment date after reasonable attempts to locate him, the plan may make a retroactive payment (to the date payment should have begun) within 60 days after the date the participant’s benefit can be ascertained or the date the participant is located. Since the benefit would be calculated as of the retroactive date, there is no actuarial increase (however, the retroactive payments should be calculated with interest).
In addition, a defined benefit plan is permitted under Treasury Regulations § 1.417(e)-1(b)(3)(iv) to specifically base benefits on a retroactive annuity starting date if certain requirements are met. A retroactive annuity starting date (RASD) is a date that occurs before a participant is provided with a written qualified joint and survivor annuity but on which he would otherwise be able to begin receiving benefits under the plan. A plan that contains a RASD provision may, for example, permit a terminated vested participant to elect his employment termination date as his retroactive annuity starting date. The plan would then begin paying a benefit calculated as of the participant’s employment termination date and provide make-up payments (plus interest) for the period from his employment termination date to the current date. If the RASD is the participant’s normal retirement date, the RASD provision would serve to eliminate the Section 411(c)(3) actuarial increase for the participant because the benefit would be calculated as though it had begun on the participant’s normal retirement age. The participant would, however, be made whole through the make-up payments.
It is always important to administer a plan according to its terms, as well as Code provisions and pertinent regulations. The DOL’s current audit campaign has served to identify which areas it deems particularly significant. Now is a good time for plan sponsors to thoroughly review how their plans handle post–normal retirement age benefit payments, and put in place new practices if they will align better with plan sponsor objectives.
If you have questions about how to address post–normal retirement age benefits, please reach out to the authors or your Morgan Lewis contact.