Rev. Rul. 83-97

PURPOSE

This revenue ruling provides guidelines for determining whether the benefits paid at an age before age 65 under an integrated excess defined benefit plan satisfy the requirements of Rev. Rul. 71-446, 1971-2 C. B. 187. The ruling also reinstates in limited circumstances the 1/12, 1/24 reduction rule deleted by Rev. Rul. 75-480, 1975-2 C.B. 131.

BACKGROUND

Rev. Rul. 71-446 provides guidelines for determining whether a retirement plan properly integrates with employer provided benefits under the Social Security Act.

For a participant with 15 or more years of service at age 65, section 5.02 Rev. Rul. 71-446 limits the retirement benefit in a plan without ancillary benefits (other than an early survivor annuity) to a single life annuity commencing at age 65 equal to 37 percent of average compensation in 'excess of the integration level.

Section 10 of Rev. Rul. 71-446 adjusts this limit for plans with a normal retirement age (NRA) lower than age 65 or for retirement before age 65 in a plan with an age 65 NRA. Section 10.02 provides that the benefits payable before age 65 cannot exceed the actuarial value determined at the time of retirement of the maximum benefits that could be provided in accordance with section 10.01 of the revenue ruling. This requirement is deemed to be satisfied if the benefits do not exceed the maximum benefit determined in accordance with section 10.01, reduced by 1115 for each of the first five years and 1/30 for each of the next five years by which the starting date of the annuity precedes age 65, and reduced actuarially for each additional year thereafter. Section 10.01 provides, for retirement before age 65, a maximum allowable benefit payable at age 65 under a flatbenefit excess plan of the maximum benefits beginning at age 65 multiplied by a fraction not to exceed one, the numerator of which is the actual number of years of service with the employer at retirement, and the denominator of which is the number of years of service with the employer that the employee would have if he or she remained in service until age 65. Accordingly, for retirement before age 65, sections 10.01 and 10.02 of Rev. Rul. 71-446 collectively require two reductions when determining the maximum benefit that is payable at such retirement age under a flat benefit excess plan.

Rev. Rul. 75-480 modified Rev. Rul. 71-446 to delete section 10.022. Section 10.022 of Rev. Rul. 71-446 had provided an alternative rule for determining the maximum allowable benefit payable, in the case of a flatbenefit excess plan, upon retirement at an age lower than age 65. The alternative rule allowed for a reduction of 1/12 for each of the first five years and 1/24 for each additional year by which the starting date of the annuity preceded age 65. This alternative rule could be satisfied in lieu of the reductions otherwise required by section 10. This rule was deleted because the use of the 1/12, 1/24 reduction for purposes of determining early retirement benefits in a plan with a normal retirement age of 65 resulted in a failure to satisfy the nonforfeitability rules in section 411 of the Code.

In determining the maximum benefit payable at a normal retirement age before age 65, however, a violation of the nonforfeitability rules of section 411 will not result from use of the 1/12, 1/24 rule.

BASIC GUIDELINES

Section 3.01 of Rev. Rul. 75-480 is modified to reinstate as an alternate rule, the use of the 1/12, 1/24 rule solely for determining the maximum integration benefit payable at a normal retirement age before age 65. However, in determining the maximum early retirement benefit payable prior to such normal retirement age, the 1115, 1/30 reduction (1115 for each year prior to NRA until age 60, 1/30 for each year prior to age 60 until age 55, and reduced actuarially for each additional year) in section 10.021 and the reduction in section 10.01 apply.

APPLICATION

Many plans that have a normal retirement age lower than 65 fail to provide for both of the reductions required by section 10.01 and 10.02 of Rev. Rul. 71-446. Pursuant to the authority in section 7805(b) of the Code any plan that has received an opinion letter, notification letter, or determination letter with respect to such a provision but that fails to satisfy the requirements of Rev. Rul. 71- 446 and this ruling because both reductions were not made will not be considered as failing to satisfy such requirements until the first plan year beginning after December 31, 1983.

EXAMPLES

The principles of this revenue ruling are further illustrated in the following examples. In the examples all plans provide a normal retirement benefit of a single life annuity. The early retirement benefit is also a single life annuity beginning at early retirement. All optional forms of benefits (including automatic joint and survivor options) are actuarially equivalent to the normal forms. No ancillary benefits are provided except the required early survivor annuity. Average compensation in all of the plans is over the five consecutive years providing the highest such compensation. In any example where the maximum allowable benefit is computed using the 1115, 1/30 adjustment, a higher maximum may be allowed if based on a reasonable actuarial reduction in lieu of the 1115, 1/30 reduction.

Example 1

Under this plan, the normal retirement age is age 65. The normal retirement benefit is 37.5% of average compensation in excess of covered compensation. Covered compensation is from Table I of Rev. Rul. 71446. Early retirement may take place at any time from age 55 to 65. The early retirement benefit is 37.5% reduced by 1115 for each of the first five years and by 1/30 for each of the next five years before age 65 that early retirement takes place.

A participant who has service from age 25 to age 55 and who retires at age 55 receives a benefit from the plan of 18.75% (37.5 x 15/30). For this participant, the maximum allowable excess benefit under section 10 of Revenue Ruling 71-446 is 14.0625% (37.5 x 15/30 x 30/40). The excess benefit provided by the plan exceeds the maximum allowable excess benefit. Therefore, the plan fails to satisfy the requirements of Rev. Rul. 71446.

Example 2

Under this plan, the normal retirement age is age 63. The normal retirement benefit is 32.5% of average compensation in excess of covered compensation (again from Table I of Rev. Rul. 71-446). The plan does not provide any early retirement benefit.

For a participant who has service from age 40 to age 63, the maximum allowable excess benefit is 29.9% (37.5 x 13/15 x 23./25) under section 10 of Rev. Rul. 71-446 (prior to publication of this revenue ruling). Using the 1/ 12, 1/24 reduction for a normal retirement age before age 65 (as allowed by this revenue ruling), the maximum excess benefit at age 63 is 31.25 (37.5 x 10/12). Because the plan benefit of 32.5% exceeds the maximum allowable excess benefit, the plan fails to satisfy the requirements of Rev. Rul. 71-446.

Example 3

Under this plan, the normal retirement age is age 63. The normal retirement benefit is 31.25% of average compensation in excess of covered compensation (Table I of Rev. Rul. 71-446). Early retirement may take place at any time from age 55 to 63. The normal retirement benefit of 31.25% is the maximum excess benefit allowed (37.5 x 10/12) and satisfies Rev. Rul. 71-446.

In order for the early retirement benefit to satisfy Rev. Rul. 71-446, the maximum allowable early retirement benefit is 31.25% reduced by 1/15 for each year to age 60 and by 1/30 for each year thereafter to age 55 and also reduced by the ratio of the number of years of service at early retirement age to the number of years of service the participant would have at age 63. Thus, for a participant who enters at age 40 and who retires at age 57 the maximum allowable excess benefit at age 57 is 16.17% (31.25 x 21/30 x 17/23).

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 71-446 and Rev. Rul. 75-480 are modified to restore the use of the 1/12, 1/24 rule for determination of the maximum benefit payable at a normal retirement age less than 65.