Rev. Rul. 81-210

SECTION 1. PURPOSE AND BACKGROUND

.01 The Internal Revenue Service has formulated the following guidelines in connection with the amendment of a mandatory retirement age provision, as required by the Age Discrimination in Employment Act Amendments of 1978 (Pub. L. 95-256) (Act).

.02 The Act provides, in part, that employers may not require the involuntary retirement of certain individuals who are less than age 70.

.03 As a result, employers may have to amend their plans to comply with the Act.

SECTION 2. GENERAL RULE

.01 Rev. Rul. 71-24, 1971-1 C.B. 114, provides that a participant in a plan qualified under section 401(a) of the Internal Revenue Code may continue to work past normal retirement age. Consequently, an amendment to a qualified pension, profit-sharing, stock bonus, or annuity plan, solely to increase the mandatory retirement age, will not, by itself, adversely affect a previously issued favorable determination notification, or opinion letter.

.02 However, plan sponsors should be aware that the amendment of a mandatory retirement age provision could interact with other plan provisions so as to endanger the plan's qualified status. The following, although not intended to be all-inclusive, are circumstances under which such interaction is likely to arise.

SECTION 3. VESTING AND ACCRUED BENEFITS

.01 Section 1.411(a)-7(b)(1) of the Income Tax Regulations defines "normal retirement age" for purposes of determining a participant's accrued benefit and vesting percentage. That section states a general rule for determining normal retirement age and then adds a requirement that normal retirement age may not exceed the mandatory retirement age (if any) under the plan or imposed by the employer. As a result, if a plan's normal retirement age is related to its mandatory retirement age and if, in accordance with the Act, the plan is amended to increase its mandatory retirement age, then such an amendment may also increase the plan's normal retirement age. Furthermore, if the plan was drafted so that the normal retirement age was defined to be the same as or a function of the mandatory retirement age, an adjustment to the mandatory retirement age would also change the normal retirement age. Thus, a plan amendment altering the normal retirement age or raising or eliminating the mandatory retirement age may have several effects on the determination of a participant's accrued benefit or vesting percentage under the plan. The following subsections discuss these effects.

.02 Accruals After Normal Retirement Age. Section 411(b) of the Code provides that a defined benefit plan must, in any given year, satisfy one of the three alternative methods specified therein. These methods are: the 3 percent method, the 1331/3 percent rule and the fractional rule. The 1331/3 percent rule and the fractional rule do not require accrual of benefits for a participant who continues to work after attaining normal retirement age. See sections 1.411(b)-1(b)(2)(ii)(E) and 1.411(b)-1(b)(3)(ii)(C) of the regulations.

Under section 411(b)(1)(A) of the Code and section 1.411(b)-1(b)(1) of the regulations a plan satisfies the 3 percent method if the accrued benefit to which each participant is entitled is not less than 3 percent of the normal retirement benefit to which the participant would have been entitled if participation commenced at the earliest possible entry age under the plan and was continuous until the earlier of age 65 or the normal retirement age specified under the plan, multiplied by the number of years (not in excess of 331/3) of participation in the plan, including years after normal retirement age.

The minimum accrued benefit under the 3 percent method requires that years of participation after normal retirement age be taken into account in determining an individual's accrued benefit. Therefore, if a plan previously satisfied the 3 percent method because, for example, there could be no service or participation subsequent to the mandatory retirement age (which coincided with the normal retirement age), and the mandatory retirement age is modified so that there could be service after the normal retirement age, then an amendment may be required to take into account service after the normal retirement age in determining a participant's accrued benefit.

.03 Plans Satisfying the Fractional Rule of Benefit Accrual. Although a defined benefit plan using the "fractional rule" of computing a participant's accrued benefit need not provide for benefit accruals for participants who work past normal retirement age, if such a plan is amended to increase the mandatory retirement age and thus the normal retirement age, provisions must be made, in accordance with section 411(d)(6) of the Code, to prevent a retroactive reduction in accrual of benefits.

Example: Corporation Y maintains a defined benefit plan that provides 30 percent of a participant's average compensation for the immediately preceding five years, commencing at mandatory retirement age 65. The plan contains no other provisions designating retirement age. Employee A begins participation at age 60. At age 63, A's accrued benefit is determined under the plan by multiplying 30 percent of A's final average pay by a fraction of 3/5 (years of participation divided by years of participation A would have had at normal retirement age). If the mandatory retirement age is increased to age 70, then normal retirement age, for purposes of section 411, increases to the later of age 65 or 10 years of participation. If the method of determining the accrued benefit is not changed, A's accrued benefit at age 63 will be 30 percent of final average pay times 3/10 (years of participation divided by years of participation A would have had at the new normal retirement age of 70). A's accrued benefit will decrease because of the amendment increasing the mandatory retirement age and, thus, increasing the normal retirement age. The plan must, therefore, also be amended to prevent a decrease in any participant's accrued benefit.

.04 Changes in Vesting Schedule. Under section 411(a) of the Code a plan must provide that an employee's right to the normal retirement benefit is nonforfeitable upon the attainment of normal retirement age.

Section 411(a)(10)(B) of the Code provides that if a plan amendment changes any vesting schedule under the plan, each participant with 5 or more years of service must be permitted to elect to have his nonforfeitable percentage computed without regard to the amendment. Section 1.411(a)-8(c)(1) of the regulations provides that an amendment of a vesting schedule is each plan amendment which directly or indirectly affects the computation of the nonforfeitable percentage of employees' rights to employer derived accrued benefits.

A plan amendment increasing the mandatory retirement age and, thus, the normal retirement age could have an effect on the time an employee would become 100 percent vested in such employee's normal retirement benefit. In accordance with section 1.411(a)-8(c)(1) of the regulations, the amendment would constitute an amendment of the vesting schedule. Therefore, the plan must provide each employee who has 5 years of service with an election to continue to vest under the original vesting schedule, that is to become 100 percent vested at the lower normal retirement age.

Example: Corporation Z maintains a qualified pension plan that provides that a participant's right to normal retirement benefits is 100 percent vested upon attainment of mandatory retirement age 65. The plan contains no other provision designating a retirement age. In 1979 the plan is amended to increase the mandatory retirement age to age 70, thus increasing the normal retirement age to the later of age 65 or 10 years of participation. The plan would not be qualified unless it gave each employee with 5 years of service an election to become 100 percent vested at age 65.

SECTION 4. LIMITATIONS ON BENEFITS

In the case of a defined benefit plan that bases the plan benefit on years of participation or service, a plan amendment to increase the mandatory retirement age may have an effect as to the limitations on benefits under section 415(b)(1) of the Code.

Example: A defined benefit plan provides an annual life annuity of 21/2 percent of the participant's average compensation for the highest consecutive 3 years times the number of years of participation; the mandatory retirement age is 65; and an employee must be age 25 to participate in the plan. The plan satisfies the limitations in section 415(b)(1)(B) of the Code because no participant can receive a benefit in excess of 100 percent (40 years time 21/2 percent) of average compensation for the high three years.

However, if the plan is amended to increase the mandatory retirement age to 70, a participant could continue to participate after age 65 and possibly accrue a benefit of 112.5 percent (45 years times 21/2 percent) of average compensation for the high three years. Therefore, unless a provision is added to limit the accrual to 100 percent, the plan will not satisfy section 415(b)(1)(B) of the Code.

SECTION 5. DISCRIMINATION IN CONTRIBUTIONS OR BENEFITS

Discrimination may result in the case of a defined contribution plan that is amended to increase the mandatory retirement age and to provide that no employer contributions will be allocated to a participant after attaining normal retirement age.

Section 401(a)(4) of the Code provides that a plan will be qualified if the contributions or benefits under the plan do not discriminate in favor of employees who are officers, shareholders, or highly compensated.

Rev. Rul. 76-250, 1976-2 C.B. 124 provides that a defined contribution plan will not fail to satisfy the requirements of sections 410 and 411 of the Code (participation and vesting) merely because it does not provide for an allocation to a participant. However, if such a plan thereby discriminates in favor of employees who are officers, shareholders, or highly compensated, then it will not satisfy the requirements of section 401(a)(4) of the Code.

Accordingly, a defined contribution plan which is amended to increase the mandatory retirement age may provide that no employer contributions will be allocated to a participant after such participant attains normal retirement age. However, discrimination prohibited by section 401(a)(4) of the Code may result because of failure to provide such allocations.