Suspension of Benefits (Part 1)
What is “Suspension of Benefits”? The purpose of this post is to provide an overview of the rules as they apply to the suspension of benefits and to the adjustment of benefits not received during the suspension period as it relates to defined benefit plans. (To read Part 2, click here.) It is not intended to be a comprehensive treatise of the subject. For those who want a more in-depth reading of the regulations, the following reference provided by Jim Holland is helpful: Rev. Rul 81-140. This provides references of the applicable Code sections and regulations. It also provides examples of how the rules apply to certain situations. It also includes reference to the equivalent ERISA section 203.
What is Suspension of Benefits and why is it a consideration in plan design and plan administration? It is my goal to highlight items that should be considered.
The Five W’s of the Suspension of Benefit Rules
What is the Suspension of Benefits Rule?
- Who should get notified?
- What should be in the Notice?
- Who should the Notice be issued to?
- What are the adjustments to the suspended benefits?
What is the Suspension of Benefits Rule?
IRC 411(a) requires a participant’s benefit to be non-forfeitable upon reaching normal retirement age. IRC 401(a)(14) requires a plan to distribute the benefits after a certain period of time past normal retirement age. The plan, however, can suspend the benefits to the group of participants described below without violating IRC 401(a) (14) or IRC 411(a).
- Those who elected to defer receiving their benefits after they reached normal retirement age.
- Those who started to receive their benefits but elected to come back to work. The plan can suspend their benefit, up to the suspendible amount, for each calendar month; or for each 4- or 5-week payroll ending in a calendar month during which a re-employed employee performs a 411(a)(3)(B) service. Generally, this is 40 hours in a month.
What must the plan do to be able to suspend the above benefits? The plan has to notify the following individuals:
- Employees whose benefit payments are suspended upon re-employment.
- Employees who continue to work beyond normal retirement age even if they are not currently receiving benefits. However, it need not be given to employees who continue to work beyond normal retirement age if these employees’ benefits will be actuarially increased to reflect postponement of benefits. The Suspension of Benefit Rules merely apply when there is a decrease in actuarial value.
Note that employees who have terminated employment and elected to defer benefits, the Suspension of Benefits rules do not apply to them.
What Must the Notice Contain?
The notice must contain the following information:
- Specific reasons why the benefits are suspended
- Description of the plan’s suspension provisions
- Copy of the plan’s suspension provisions
- Statement explaining that the participant can find the applicable DOL regulations in Section 2530.203-3 of the Code of Federal Regulations
- Description of the procedure and forms, if any, for notifying the plan that benefits should resume
- An explanation of any offset against post-suspension benefits for benefits that should have been suspended but were not, including period of employment affected, amount subject to the offset, and how the offset will be made
If the plan’s summary plan description (SPD) contains substantially the same information, the suspension notice may refer to the relevant portions of the SPD. However, the suspension notice must explain how a participant may obtain a copy of the SPD, and explain that a request for an SPD must be honored within 30 days.
When Should the Notice Be Issued?
The Notice of Suspension of Benefits must be provided to participant during the first month or payroll period in which benefits are suspended. The notice may be distributed by first-class mail or personal delivery service. In addition, the notice may also be distributed electronically pursuant to the DOL’s electronic distribution safe harbor rules.
What Adjustments Are Needed To Compensate for the Suspension of Benefits?
The plan has a number of options to a participant who continues to work beyond normal retirement. These options include:
(a) The plan starts paying the benefit even while the participant continues to work for the employer and the participant continues to earn additional benefits. The plan can also continue to pay the benefit when the participant leaves employment and is again re-employed. His/her benefit can be reduced by the actuarial equivalent value of the benefit he received. This alternative can be expensive for the plan. For this alternative, there is no need to provide the participant a Notice of Benefit Suspension.
(b) The plan provides that to a participant who continues to be gainfully employed with the employer after his/her normal retirement age, the participant will receive at the date of termination the greater of (i) his/her accrued benefit, or (ii) the actuarial equivalent value of his accrued benefit at his/her normal retirement age. Alternatively, the plan may provide that the participant’s accrued benefit is determined at the end of each plan year (but not payable until the date of termination) to be the greater of either item (1) or item (2): (1) the accrued benefit determined at the end of the preceding plan year, plus the benefit earned during the year; or (2) the accrued benefit at the end of the last plan year actuarially increased to the end of the current plan year.
(c) Provide the participant the Notice of Suspension of Benefits advising the participant that he/she will not be paid until he/she terminates employment.
(d) For participants who are rehired, the suspension of benefits process can be very complicated. The adjustment depends on when the participant left employment and when he/she becomes re-employed. There are multiple issues that should be considered which will be the topic of a separate article.
Finally, if the participant’s benefit was suspended prior to his required beginning date (this is the April 1 following the year the participant attains age 70-1/2), no adjustment is required up to required beginning date. The participant’s benefit will need to be actuarially adjusted if he continues to work past his required beginning date.
To a participant who could have commenced distribution at his/her normal retirement date, but elects to defer receipt of his/her benefit, some of the options that a plan can provide are the following:
- The plan may provide for a retroactive annuity starting date that allows the participant to elect to commence benefits at a delayed commencement date and to receive a lump sum payment that is equal to all the missed payments retroactive to the normal retirement date (with spousal approval, if applicable).
- If the plan is silent on how to treat a delayed benefit commencement date and/or any adjustment on delayed benefits, the benefit should be actuarially increased to recognize the delayed commencement of the benefit payments.
One important caveat: There are also some special rules that apply for multi-employer plans when an employee is re-employed in the same industry or craft in the same geographic area covered by the plan. Beyond this very simplistic description, a further analysis of the multi-employer rules is saved for another post.
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Being knowledgeable of the above represents an added tool to your plan design options and how best to handle your plan administration.