As previously indicated in Part 1 of this article, the suspension of benefits process can be very complicated. A phrase we often hear, “It depends on the specific set of facts and circumstances,” is very much applicable in applying the suspension of benefits rules. A variety of situations can arise, with each situation requiring a unique approach.
The following points may serve as a guide in analyzing a given set of facts and circumstances. They can also serve as guidelines in drafting a plan document. Generally, these items have to be taken in their entirety, since generally one will have an effect on the others. The comments below assume that the Notice of Suspension of Benefits has been properly issued; and they represent our best interpretation of the regulations.
(a) Regulations are only minimum requirements. The plan can impose more stringent requirements before a benefit suspension will occur (e.g., the plan does not even need to suspend benefits). For example, if the minimum requirement of suspending benefits applies only to those participants who work at least 40 hours per month is an administrative burden, this threshold can certainly be increased. Also, if paying a plan benefit while the employee is still being compensated by the employer is not acceptable to the employer, the level of the threshold can be set to a level the employer deems acceptable provided the threshold is no less than 40 hours per month. As you can see, setting the threshold is critical in applying the suspension of benefits rules.
(b) Only benefits that are being or can be paid in some form of annuity at normal retirement age can be suspended; there has to be a reason to suspend the benefit and those reasons must be in the plan provisions. Re-employment is one reason to suspend benefits. Continued employment past normal retirement is another (call a “suspension” even if annuity payments have not yet actually commenced). Absent these reasons, the benefit has to be increased to reflect the delayed receipt of the benefit past normal retirement age. Since the increase is deemed to keep the benefit whole so that no forfeiture occurs, the benefit is no longer deemed “suspended.” For example, the plan can suspend the benefits of employees who continue to work past normal retirement even if the plan was frozen. However, the plan has to actuarially increase the benefits of terminated vested participants who elect to defer receipt of their benefits because those deferred vested participants are no longer working.
(c) The 415 limit applies on the aggregated benefit and in a change of benefit form.
(d) Accrual rules continue to apply. Benefit accrual rules must be considered in cases where the employee retired at his/her normal retirement age, started to receive benefits, was rehired and then started to accrue additional benefits. How to account for the additional accruals is something to consider, and will be dependent on whether the benefits that were being received have been stopped.
(e) Annuity starting dates and multiple annuity starting dates. This is something to consider in cases where the employee retired at his/her normal retirement age, started to earn a benefit, and then was rehired, the prior benefit was suspended, and then the employee started to accrue additional benefits. The plan should describe what options to offer on the pre-suspension benefits (e.g., original form must be continued with original beneficiary(s), a new annuity form will be elected , etc.) and how the post-suspension benefits will be calculated (e.g., will benefits be bridged, will the new accruals be calculated as if the individual is a new participant (“A” + “B”), etc.).
How will the plan administration team apply the above in the sample of issues described below?
Administration procedures. The procedures must have a tracking mechanism to address the following situations:
(a) Identifying the participants that need to be notified of the suspension of benefits rules.
(b) Establishing and tracking the hours threshold.
(c) Identifying the participants whose benefits will need to be calculated, recalculated and/or reinstated.
(d) Communication of relevant information to the participant, plan administrator, plan sponsor, actuary and other affected parties, with careful documentation that such notification occurred.
Recalculation of benefits issues. Following are some of the factors to consider when recalculating a previously suspended benefit. This is only a partial list.
(a) What was the post-suspension monthly hours history of the participant?
(b) For what months could the benefit be suspended?
(c) When did the participant ultimately terminate employment?
(d) What is the Required Beginning Date?
(e) What benefit distribution options are available to the pre-suspended benefits and the new accruals?
(f) How will the additional accruals be calculated?
When did the participant terminate employment?
Vested participants who terminate their employment prior to their normal retirement age. The benefits for deferred vested participants who have not commenced payment at normal retirement age will need to be actuarially increased for the period between the normal retirement age and the date of actual commencement. All forms of benefits will be available to the terminated vested participant when he/she eventually decides to retire. The plan’s definition of actuarial equivalence will specify the basis to be used to calculate the increased benefit.
Participants who decide to continue work after normal retirement age. Under the suspension of benefits rules, their benefit can be suspended until they reached their Required Beginning Date. If the participant is a 5% owner, this date will be April 1 of the calendar year following the year they reached age 70-1/2. For all others, it is the later of either the April 1 date or the date of termination. In the situation where the Required Beginning Date is April 1 of the calendar year following the year that the employee attains age 70-1/2, there will be no actuarial increase of the benefits. In all other cases where benefit payment is delayed past the April 1 date, the benefit has to be actuarially increased from April 1 of the calendar year following the calendar year that the employee attains age 70-1/2 to the date on which benefit payments commenced.
In calculating the benefit prior to attaining the Required Beginning Date, the benefit has to be calculated based on the plan formula. Subsequent to a benefit calculated after the Required Beginning Date, the benefit will be the greater of the benefit under the plan formula and the actuarially increased benefit.
The form of the benefit elected at the actual retirement date can be different from the form of benefit elected under the Required Minimum Distribution.
Participants who retire at their normal retirement age, but return to work. Generally, the plan can suspend the benefits of this group of employees during their period of re-employment. Following are two items to consider when determining how additional accruals will be treated:
(a) One approach is to treat the additional accruals as an additional benefit from what the participant had previously received, calculated using plan terms but using benefit service attributable to the period of re-employment. The participant’s benefit at retirement will be the sum of the benefits before the suspension plus the additional benefits as limited by IRC 415. The plan can mandate that the total benefit, including the additional accruals, be paid in the same form as the initial election. The provision of the document that relates to changes in circumstances from the date of the initial election continues to apply to the new accruals. For example, if the spouse under the initial election has died, provisions under the document that governs the initial election will continue to apply. Treas. Reg. §1.401(a)-20 — Q10(d) explicitly permits the use of this method.
(b) Another approach is to recalculate the benefit using current plan terms but offsetting the recalculated benefit by the actuarially adjusted value of prior distributions. This can lead to multiple annuity starting dates and complicate the 415 limit testing. It is beyond the scope of this paper to discuss this complexity.
The issues surrounding how each plan handles suspension of benefits is complex and requires careful reading of plan provisions. For new plans being established, it is wise to anticipate the issues outlined above and receive input from the plan sponsor about how they will want to administer the rules.
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