411 Accruals

Question 1

What is the 3% Rule?

Answer 1

A participant must earn over 3%YOSNormal Retirement Benefit. The calculation assumes that participant enters at the earliest possible age, serves continously until min(65, NRA), all projection factors (like Social Security) are constant and compensation is the same as the average of the highest X years (not more than 10).

Question 2

What is the 133 1/3%?

Answer 2

Benefit accrual rate in a year must be less than or equal to 4/3 the accrual rate of any prior year. Calculation is based on the normal retirement age, and a hypothetical ptp that could or is able to be a ptp, and holding projection factors constant. Note: Change in accrual rate that doesn’t apply to any individual who is or could be a ptp is ignored. Plan amendments are treated as iff they were in effect for all prev. years when testing.

Question 3

Fractional Rule

Answer 3

Accrued Benefit must be greater than ((Current SvC)/(Svc at NRA))*(Projected NRA Benefit) Assuming constant projection factors like Social Security

Question 4

If a ptp terminates and takes full benefit. Does it affect benefit service/vesting service upon rehire?

Answer 4

Yes - ignore the previous benefit service but doesn’t affect vesting service. If pay back with interest then you do count previous benefit service.

Question 5

If a DPM benefit is $12 but is increased to $20 by an amendment, does that violate the 133 1/3% rule?

Answer 5

No - the 3 accrual rules are all applied as if the amendments have always been in place

Question 6

What plans are exempt from the accrual rules in 410(b)?

Answer 6

Fully insured plans.

Question 7

Can the accrued benefit decrease on account of increasing age or serve?

Answer 7

No. Less Tested: Technically it can for benefits that decrease based on attainment of eligibility for Social Security Benefits.

Question 8

Can the accrued benefit decrease on account of lower salary?

Answer 8

No - that would be deemed a decrease in accrual due to additional service

Question 9

Can a plan limit benefits based on age? Service? Total Benefit?

Answer 9

Plans cannot limit benefits based on reaching a certain age. They can limit the overall benefit or the years of service used to determine the benefit.

Question 10

How does post-NRA benefit accruals work?

Answer 10

Cannot just stop the benefit at NRA. Options:1. In-Service distribution and reduce benefit accruals by the actuarial equivalent of benefits paid each yearGive a suspension of benefits notice and2. Give greater of actuarial increases after NRA or continued benefit accruals3. Continue benefit accrual service after NRA

Question 11

Under a DB Plan, benefit accruals can’t be reduced based on age. Are there any such restrictions for a DC Plan?

Answer 11

Yes, can’t stop/lower benefit due to an attainment of any age

Question 12

Definition of a year of participation

Answer 12

12-consecutive month period (from DOH) where ptp completes 1000 hours of service. If less than 1000 hours starting from DOH, can begin from 1st day of plan year.

Question 13

What is the comparison to similarly situated younger employee provision? Who does it apply to? Are there any benefits excluded for the comparison?

Answer 13

1. You have to compare a hypothetical ptp’s benefit to an employee with identical characteristics (except age) and the older employee should have a higher benefit.2. Applies to all plans.3. Can disregard subsidized early retirement benefits

Question 14

A benefit is the larger of a hypothetical account balance and 2% of salary. If the 2% of salary benefit is larger, what is the worst vesting schedule you can use?

Answer 14

If any part of the accrued benefit is based on a cash balance formula then it must use 3-year cliff vesting.

Question 15

What are the requirements for the interest credits in a cash balance plan?

What is the maximum ICR fixed rate allowed?

Answer 15

1. Must be less than “market rates”(can also have a floor up to 6%)
2. If market rates are negative, can’t decrease account balance below the sum of accumulated contributions

Question 16

Applicable Plan Amendment

Answer 16

Ammendment to convert a DB plan to a cash balance plan. Also applies to the case where multiple benefits are coordinated to create the effects of a Cash Balance Plan.

Question 17

Minimum Required benefit for an Applicable Plan Amendment

Answer 17

1.Must be greater than or equal to benefit under old plan with years of service up the amendment date + benefit under new plan with years of service after the amendment date2. Must give credit for early retirement subsidies if ptp would have been eligible

Question 18

Interest rates and Mortality rates used for Plan Termination

Answer 18

Must use the rates and mortality in the plan, except that if an interest rate is variable, then it must use the average of the rates used by the plan over the last 5 years.

Question 19

Cash Balance Plan - what are the rules about Offsets, Benefit Disparity, and Indexing?

Answer 19

1. Plan may provide offsets against benefits under the plan if allowed by 401(a)2. Plan may provide disparity in contributions or benefits, if allowed under 401(l)3. Plan may index accrued benefits, but cannot decrease the accrued benefit below non-indexed value. (Can decrease variable annuity benefit)

Question 20

Definition of Accrued benefit derived from employer contributions

Answer 20

Total Benefit - Accrued Benefit derived from EE contributions

Question 21

Employee Provided Benefit under a DC Plan

Answer 21

Amount of the separate account (i.e. employee contributions and their returns, withdrawals…)or if there is not a separate account, then total account * (EE contributions - withdrawals) / (Total Contributions - withdrawals)

Question 22

Employee Provided Benefit under a DB Plan

Answer 22

1. Accumulate all mandatory EE contributions with 120% of the Federal Midterm Rate up to determination date2. Accumulate from determination date to NRA with the 417€ rate3. Convert to annuity based on 417(e) rate a. If plan’s normal form of payment is not SLA, convert to normal using plan’s conversion rates

Question 23

How does a plan decide how to allocate funds on plan termination?

Answer 23

Before a plan terminates, they must add an amendment which describes how to allocate the remain funds. Only have to fund up to the benefits. I.e. if 112% funded, my understanding is they can revert the 12% back.

Question 24

What are protected benefits?

Answer 24

Accrued Benefits, Early Reteriment Benefit/Subsidies, Retirement Type Benefit/Subsidy, Optional Forms of payment

Question 25

Can a DC plan eliminate a FOP?

Answer 25

Yes if they a LS is offered on that portion of the acccount, then you can eliminate any FOP

Question 26

If you have two amendments: 1 increases the accrued benefit, and one makes the ERF worse. ÂDoes this decrease a protected benefit?

Answer 26

No as long as no ptp has a lower benefit– consider the amendments together.

Question 27

T/F if a participant is not fully vested in an accrued benefit, you can change the ERF or accrued benefit

Answer 27

FALSE -ÂCan’t decrease accrued benefit. (e.g. can’t change how YoS is calculated, compensation, adding any restriction … basically ask “Is anyone worse off?”)

Question 28

What are the 6 listed form of payment families?

Answer 28

JnS 50 to Jns 100
SLA to JnS 49
Certain and Life < 10 Years 
Certain and Life >= 10 Year
Certain Only < 10 Years
Certain Only >= 10 Years

Question 29

What is a redundant benefit and what can you do with it under 411(d)-6?

Answer 29

It is a FOP in the same family as another FOP. You can eliminate it without violating the anti cut back rules

Question 30

What are the Core Benefits?

Answer 30

SLA
JNS 75 (or JNS50 and JNS100)
C&L 10
Most Valuable form for a ptp with short life expetancy

Question 31

What is the most valueable FOP for a participant with a short lifespan

Answer 31

Can assume the following benefits (in order) are most valuable if greater than PV of all benefits being eliminated:
LS, JnS 75 (or higher if plan offered higher percentage), C&L of at least 15 years

Question 32

Examples of benefits not protected

Answer 32

a. Death or disability benefit

b. Ancillary life insurancec. Health insuranced. Right to make 401(k) deferral

Question 33

T/F if a ptp doesn’t meet the ER subsidy service requirement on the day that the ER subsidy is removed then they don’t need it protected

Answer 33

FALSE - always need to protect the acrued benefit’s Early retirement subsidy

Question 34

If an employee provided benefit is $4,000 and the plan’s provided benefit is $3,600, what is the vested accrued benefit?

Answer 34

$4,000

Question 35

How do the following events affectÂvesting?1. Reach NRA2. Reach Early Ret3. Become Disabled4. Die

Answer 35

Participants must be 100% vested upon reaching the NRA of the plan.

Question 36

How does qualified military service affect vesting/death benefits?

Answer 36

1. Mus receive vesting service for years with military if reemployed by employer after.2. If dies in qualified military service then vesting in death benefit must reflect years with military.

Question 37

How do you apply the fractional rule if paticipant earns less than 1 year of service.

Answer 37

In either case, you set the current accrual fraction to (years earned (including partial) / total years that were expected)1. In the future acrue slightly faster by using (1 - accrual frac.)*(1 / Years Remain)Â OR2. adjust bottom of fraction to meet new expected years at retirementÂÂUnder the fractional rule, you should accrue equal parts of the benefit up to your NRA.Â

Question 38

How are voluntary contributions handled?

Answer 38

Seperate account rolled forward with trust returns

Question 39

How do you convert from an annual annuity to a monthly annuity

Answer 39

Annual - 11/24

Question 40

Someone has 3 YOS, terminates and takes full benefit. When they are rehired after 5 years, do they lose those the vesting service? benefit accrual service?

Answer 40

Yes they lose benefit accrual, no they don’t lose vesting service.