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Pension Payments and Prolonged Professions

Practice Management

It’s not exactly news that staying on the job past one's normal retirement age is a growing phenomenon. Of course, that has a direct effect on the employees who decide to prolong their tenure, but it has implications for employers and plans as well. Among them is how to handle pension payments in such a circumstance, as a recent blog post points out.

In “Payment of Defined Benefit Plan Benefits After Normal Retirement Age,” an entry in the Morgan Lewis blog “Benebits,” Elizabeth G. Kennedy and Brian J. Dougherty discuss the rules as well as the interest of federal agencies in how retirement benefits are handled when they begin after normal retirement age.

A DB plan “must generally increase a normal retirement benefit actuarially where payment begins after a participant’s normal retirement age,” Dougherty and Kennedy write, citing Code Section 411(c)(3), which provides that a pension plan participant’s benefit must be actuarially increased if it is to begin then.

Kennedy and Dougherty note, however, that in some cases it is also permissible under the federal tax code and the regulations that implement it to pay the normal retirement benefit amount in addition to make-up payments. They also write that there is an exception from this rule if a participant stays on the job after normal retirement age, and the plan contains and properly administers a suspension of benefits provision under Code Section 411(a)(3)(B) and Section 203(a)(3)(B) of ERISA  and their underlying regulations. And they add that Treas. Reg. §1.417(e)-1(b)(3)(iv) allows a DB plan to specifically base benefits on a retroactive annuity starting date as long as certain requirements are met.

The Department of Labor (DOL) also has something to say about this kind of circumstance. Kennedy and Dougherty write that they think that the DOL’s “extensive investigation” of DB plans makes it apparent that the DOL “is quite focused on timely payment of plan benefits to participants.” But they argue that the DOL’s interest also extends to how a participant is made whole when benefits begin after normal retirement age.

Action Steps

“It is always important to administer a plan according to its terms, as well as Code provisions and pertinent regulations,” suggest Kennedy and Dougherty. They add that “it may be wise for plan sponsors to review pertinent plan provisions and operation to make sure they comply with applicable rules,” given the interest the DOL evinces in this kind of situation.

“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,” Kennedy and Dougherty write.