1. Accrued Benefit Requirements Fundamentals I of Retirement Plan Issues Chapter Six

2. 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 2

3. 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 (NRA) In a DC plan, the accrued benefit is the balance of the participant’s account Accrual rate versus accrued benefit Valuation required annually 3

4. 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 4

5. 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 5

6. 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 6

7. 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 7

8. 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 §411(b) – The 3% method – The 133⅓ rule – The fractional rule 8

9. 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 9

10. 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? 10