31. Formula to determine accrued benefit

Statement of Requirement: Code §§I RC 411(a)(7), 411(b); Reg. §§ Treas. Regs. 1.401(a)1(b)(1), 1.411(a)-7(a)(1), 1.411(b)-1; Prop. Treas. Reg. 1.401-7(a); Rev. Proc. 2017-41, secs.6.03(7 2023-37, 10.02(2)(f ),6.03(15 )(vi), 10.02(2) (k)

Document Provision: _____

(Note to reviewer: The following provisions, when used with the definitions of year of credited service, compensation, and normal retirement benefit will satisfy the requirements of Code § IRC 411(b). Only one method need be used; however, the choice of accrual rule may be limited by the fresh-start rule elected by the employer.)

Sample Plan Language:

Provision #1 – 133⅓% Rule

Each participant will accrue a benefit of ___ % of compensation per year of credited service. The normal retirement benefit is the total benefit accrued at normal retirement age.

(Note to reviewer: The plan can provide a step in its benefit formula as long as the annual rate at which any individual who is or could be a participant may accrue retirement benefits payable at normal retirement age is not more than 133⅓% of the annual rate at which he or she could accrue benefits for any prior plan year. Preapproved Cash Balance Plans must meet this rule exclusively. See LRM #26A.)

Provision #2 – 3% Rule

(May not be used in plans that provide for permitted disparity; or with fresh-start options 2 or 3 in section _____ of the plan)

(Note to reviewer: The blank should be filled in with the section number of the plan that corresponds to LRM #23.)

A participant’s accrued benefit at any time shall equal 3% of the normal retirement benefit, multiplied by the number of years of participation (not in excess of 33⅓), including years after normal retirement age. For purposes of determining accrued benefits, the normal retirement benefit is the benefit to which the participant would be entitled if participation commenced at the earliest possible entry age for any individual who is or could be a participant under the plan and if the participant served continuously until the earlier of age 65 or the normal retirement age under this plan. The normal retirement benefit to which a participant would be entitled shall be determined as if the participant continued to earn annually the average rate of compensation

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earned during the five (5) consecutive years of service for which such participant’s compensation was the highest.

(Note to reviewer: The last sentence of the sample language above would be used in a plan with a normal retirement benefit based on compensation averaged over a 5year period. Any plan that bases the normal retirement benefit on a period of compensation must use, for this accrual rule, the same period (but not to exceed 10 years) which produces the highest average.)

Provision #3 – Fractional Rule

(May not be used with formula without wear-away fresh-start rule in section _____of the plan)

(Note to reviewer: The blank should be filled in with the section number of the plan that corresponds to LRM #23.)

A participant’s accrued benefit at any time equals the product of the normal retirement benefit multiplied by a fraction, the numerator of which is the number of years of credited service at such time, and the denominator of which is the number of years of credited service the participant would have at the later of the year containing the participant’s normal retirement age or the current year. However, if this plan has had a fresh-start, and after the latest fresh-start date, the fresh-start rule used under the plan is the formula with wear-away, the amount in the preceding sentence will not be less than the participant’s frozen accrued benefit. If this plan has had a fresh-start, and after the latest fresh-start date, the fresh-start rule used under the plan is the formula with extended wear-away, in determining the participant’s accrued benefit with respect to years of credited service after the latest fresh-start date under the formula without wear-away, the numerator in the fraction above will be limited to the participant’s years of credited service after the latest fresh-start date. When determining the accrued benefit, the normal retirement benefit is the annual benefit to which the participant would be entitled if the participant continues to earn annually until the later of the year containing the participant’s normal retirement age or the current year, the participant’s current average annual compensation. This rate of compensation is computed on the basis of average annual compensation taken into account under the plan (but not to exceed the ten years of service immediately preceding the determination).

(Note to reviewer: The parenthetical phrase in the sample language is required when the normal retirement benefit in the plan uses a period of compensation that may exceed ten years (e.g. career average).)

Provision #4 – Cash Balance Plan

A participant’s accrued benefit, as of any determination date (on or prior to the Normal Retirement Age), means a lifetime annuity in the normal form of benefit as described in section ___ of the Plan commencing at a Participant’s Normal Retirement Age, calculated by projecting the Participant’s Hypothetical Account Balance to Normal Retirement Age with interest at the Interest Crediting Rate in effect at the date of determination, and converting the projected account to an Actuarial Equivalent benefit payable in the normal form at Normal Retirement Age, using the assumptions specified in section _____ of the Plan. In the case of a plan which provides a variable Interest Crediting Rate, the Interest Crediting Rate which is treated as in

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effect and as the projected Interest Crediting Rate shall be a reasonable projection of such variable Interest Crediting Rate, not to exceed 6%.

(Note to reviewer: The first blank above should be filled in with the section number of the plan corresponding to LRM #41 and the second blank should be filled in with the section number of the plan corresponding to LRM #42.)

A Participant’s Accrued Benefit shall not be considered to be reduced in violation of Code § IRC 411(d)(6) merely because the Participant’s Accrued Benefit fluctuates with the Interest Crediting Rate or the interest and mortality rates used to determine the actuarially equivalent benefit under the Plan.

Provision #5 – Forfeitures

Forfeitures may not be applied to increase the benefts any employee would otherwise receive under the plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions thereunder. However, the effect of forfeitures may be anticipated in determining the costs under the plan.

(Note to reviewer: Proposed rule above applies for plan years beginning on or after January 1, 2024; however, taxpayers may rely on this proposed rule for periods preceding the applicability date.)

Fully-Insured Code § IRC 412(e)(3) Plans

(Note to reviewer: A fully insured plan under Code §I RC 412(e)(3) that is a Statutory Hybrid Plan may not be a Pre-approved plan. See Rev. Proc. Revenue Procedure 2017- 412 023-37, sections 6.03(7 10.02(2)(f)(vi) and 6.03(15)) 10.02(2)(k)).

(Note to reviewer: Because of the potential for discrimination, fully-insured plans under Code § IRC 412(e)(3) in the Pre-approved Plans program must satisfy the safe harbor for Code § IRC 412(e)(3) plans contained in Treas. Reg. § 1.401(a)(4)-3(b)(5). In general, to be eligible for this safe harbor, a Code § IRC 412(e)(3) plan must:

(1) satisfy the accrual rule of Code § IRC 411(b)(1)(F) (see LRM #32);

(2) constitute an insurance contract plan within the meaning of Code § IRC 412(e)

(3) (see LRM #32);

(3) incorporate the Code § IRC 412(e)(3) fresh-start rule in LRM #23 and the

definition of frozen projected benefit in LRM #32;

(4) contain a benefit formula that would satisfy the requirements of either Treas.

Reg. § 1.401(a)(4)-3(b)(4)(i)(C)(1) (safe harbor for unit credit plans using fractional accrual rule) or Treas. Reg. § 1.401(a)(4)3(b)(4)(i)(C)(2) (safe harbor for flat benefit plans) if the participant’s stated normal retirement benefit accrued ratably over each employee’s period of plan participation through normal retirement age;

(5) provide that the scheduled premium payments under an individual or group

insurance contract used to fund an employee’s normal retirement benefit are level annual payments to normal retirement age (see LRM #32);

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(6) provide that the premium payments for an employee who continues benefiting

after normal retirement age are equal to the amount necessary to fund additional benefits that accrued under the plan’s benefit formula for the plan year (see LRM #32);

(7) apply experience gains, dividends, forfeitures, and similar items solely to reduce

future premiums (see LRM #87);

(8) provide that all benefits are funded through contracts of the same series which,

among other requirements, must have cash values based on the same terms (including interest and mortality assumptions) and the same conversion rights. A plan does not fail to satisfy this requirement; however, if any prospective change in the contract series or insurer applies on the same terms to all employees in the plan (see LRM #32); and

(9) provide that if permitted disparity is taken into account, the normal retirement

benefit formula satisfies the requirements of Treas. Reg. § 1.401(l)-3, and the 0.75% maximum excess or offset allowance is reduced by multiplying the factor by an additional 0.80 (see LRM #27D )) ).)