In this episode of the Proskauer Benefits Brief, partner Paul Hamburger, and associate Katrina McCann discuss some of the interesting and unique issues that apply when employees covered by defined benefit pension plans work beyond their normal retirement age. Once the retiree reaches age 65, suspension of benefit rules need to be considered as they are essentially vested rules designed to prevent an impermissible forfeiture of the age of 65 pension. Plan sponsors should tune is as we discuss these suspension of benefit rules, which are often misunderstood and are quite complicated.
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Katrina McCann: Hello, and welcome to the Proskauer Benefits Brief. I’m Katrina McCann. I’m an attorney in Proskauer’s Employee Benefits and Executive Compensation group, and on today’s episode, I’m joined by Paul Hamburger, who’s the co-chair of our Employee Benefits and Executive Compensation group. In this podcast, we will discuss some of the interesting and unique issues that apply when employees covered by defined benefit pension plans work beyond their normal retirement age. Paul, to get us started, we talk with clients all the time about suspension of benefits issues when employees work beyond normal retirement age. Can you tell us what the basic issue is?
Paul Hamburger: Sure, the suspension of benefit rules are often misunderstood and are quite complicated. Administrators typically will think that because the word suspension is used, it only applies when retirees are in pay status and then are re-employed, and the plan simply wants to suspend or stop paying the benefit until these employees retire again. It’s not that simple. The source of the rule is the fundamental pension plan rule that a participant’s right to his or her normal retirement-age benefit must be non-forfeitable. For this podcast, let’s assume normal retirement age means age 65, so if a plan promises to pay a benefit of say, $1,000 a month at age 65, the participant cannot be paid any less than that. If the participant continues working after 65 and is not paid that $1,000 a month, the participant will be in effect forfeiting each $1,000 monthly benefit not paid, so something has to be done to prevent that from happening. The same thing happens if a retiree in pay status is re-employed and the benefit that the retiree was receiving is no longer paid. Once the retiree reaches age 65, suspension of benefit rules need to be considered, so essentially, the suspension of benefit rules are vested rules designed to prevent an impermissible forfeiture of the age of 65 pension.
Katrina McCann: You’re talking about what happens at normal retirement age, so before we go any further, is it correct that if someone is in pension payment status and is retired before age 65 the technical suspension of benefit rules don’t apply?
Paul Hamburger: That’s right, Katrina. Plans typically will stop paying pensions to retirees who are re-employed, even before they reach age 65. When that happens, it’s advisable to inform them of what’s going to happen to their benefit and how they might or might not continue to accrue benefits for their re-employment period, but the technical suspension of benefit rules that we will discuss really don’t apply at that pre-age 65 time.
Katrina McCann: So let’s talk about what’s unique about applying these rules once someone does reach age 65.
Paul Hamburger: To do that, we need to consider that the suspension of benefit rules depends on a number of things. First, we have to see if the employee is employed in what’s called “suspendable service.” A worker who is re-employed after age 65 or continue to work beyond 65 is employed in suspendable service if he or she is paid for a period of eight or more days or 40 or more hours of service in a month. If they work less than that, the service is not suspendable. If they work more than that, the service is suspendable. Please bear in mind that in the multi-employer payment area, the concept of suspendable service is a bit more complicated. It really can relate more to the nature of the work performed as that work is covered by the plan. Now, if the work is not suspendable service, the plan has to either pay the benefit or continue to pay the benefit after age 65 or it has to provide that employee with an actuarial increase in the age 65 benefit so that there is no forfeiture in the right to that age 65 benefit. If the work is suspendable service, the plan has a choice. The plan could either provide a notice of suspension that the benefits are being suspended or the plan could provide for that actuarial increase in the benefit. To illustrate, let’s say again that our retiree’s benefit is $1,000 a month at 65 and the person continues to work in suspendable service at least 40 hours a month. Let’s also disregard any conditional accruals during that period of work so that we can see what the issue really is. If the plan simply stops paying or doesn’t pay the $1,000 a month benefit until one year later when the person actually retires, as we said before a forfeiture will occur. To prevent that forfeiture, the plan has to either provide a notice of suspension or promise to pay an actuarial increased benefit of let’s just say $1,080 a month beginning at that later age, that way the participant is, in a sense, made whole for the fact that the benefit was suspended. Adding in future accruals does complicate matters a little bit and plans to ensure that they are adjusting any actuarial increase against the value adjusted against the accrual to provide both of those benefits those two should offset each other.
Katrina McCann: So let’s assume that a plan wants to provide for suspending benefits properly. We need to make sure that we have the proper plan language, obviously, but what if the language isn’t already there. What do we need to do to start suspending benefits?
Paul Hamburger: If a plan doesn’t currently have suspension of benefit rules, it’s really not so easy to add them for existing pension accruals. The problem is that we might imposing an impermissible restriction on benefits that otherwise were not restricted, so if a plan is interested in adding the proper suspension of benefit language to a plan that didn’t otherwise have it, the sponsors should really discuss how to implement those rules properly with the advice of benefits counsel.
Katrina McCann: Instead let’s assume that the plan does have suspension of benefits rules. What should the notice look like?
Paul Hamburger: Here are the rules are a little bit unclear. From a regulatory perspective, there are specific things the notice has to say, but where it gets less clear is whether there has to be a separate piece of paper or whether some other document, like a summary plan description, can meet the rules as long as it has the required information. There is case law supporting the idea that an SPC or a summary plan description can satisfy the suspension of benefit notice requirements. I wouldn’t rely on that as an ongoing matter and instead, I think it’s advisable to consult with benefit counsel and determine how best to distribute a separate suspension of benefits notice.
Katrina McCann: So we’ve talked about plan document language and notice language. Are there any other key legal compliance points to keep in mind?
Paul Hamburger: Yes, once an employee reaches age 70 and a half, the rules on minimum required distributions over-ride the suspension of benefit rules. What that means is that if an employee is in suspendable service and even if the employee was provided with a proper suspension of benefits notice, the benefit still has to be actuarially increased for periods of employment after age 70.5. In other words, the notice is no longer effective. There are also some design considerations for plan sponsors. Many defined benefit sponsors have frozen their defined benefit plans. If that’s true, then when someone is re-employed and they are otherwise in pension payment status, does the plan really want to stop their pension. After all, as a design matter, the person won’t be accruing anything further if the plan is frozen, so it is worth considering whether the plan ought to continue the benefit suspensions at all. Some plans do. Some do not, but it is something to consider.
Katrina McCann: One final question, Paul. Can you explain what happens if a plan does have suspension of benefits language but fails to follow the plan language? For example, benefits were suspended but a notice was not provided or benefits were not suspended when they should have been?
Paul Hamburger: Well, the good news here is that the issues can be fixed through the voluntary resolution process with the IRS known as EPCRS. Plan administrators should review the facts very carefully and develop the proper correction that makes sense and protects participant interests. That can form the basis of an IRS approved solution, or in appropriate cases, self-correction. At the same time, remember that these rules also implicate ERISA rights, so any solution that is implemented needs to anticipate the possibility of participant complaints, as well as IRS qualification rules.
Katrina McCann: Thanks, Paul. That’s a very helpful summary of these complicated suspension of benefits issues. Obviously there’s a lot more to consider, and we’re happy to discuss that, as well. So thanks to all of you who joined us today for this podcast.