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Accrued Benefit: A participant in every type of pension plan has an accrued benefit. In an individual account plan (defined contribution plan), the accrued benefit is the balance in the participant's account. Once a year, and in some plans more often, the participant receives a statement of his or her account balance. The account balance generally increases every year unless there has been a substantial decline in plan assets due to investment losses. In a defined benefit pension plan, the pension benefit is defined by a formula in the plan. In most plans, the benefit increases each year as pay and years of service increase. The plan records contain the participant's accrued pension benefit for each year, which is determined as of the plan anniversary date. By referring to past records, or by a calculation using prior data for an individual, an accrued benefit can be calculated as of a past date, such as the date of marital separation or filing of the divorce complaint. A plan may not be able to provide the exact accrued benefit as of a specific date, but assuming the benefit changes one year at a time, or ratably by month over a year, the exact date benefit is not essential. If future salary increases are ignored, or if they are projected mathematically, an accrued benefit may be fairly estimated at any desired future date, such as the normal retirement date.

Accrued Benefit Fraction: ERISA requires that a defined benefit pension plan contain a stated method for determining the accrued benefit of a participant at least once a year. The most common method uses the accrued benefit fraction. The numerator of the fraction is the length of credited service in the plan, under the plan's definition of service, up to the date being measured. The denominator is the potential length of credited service in the plan if the individual continues working to normal retirement age. The accrued benefit fraction is then multiplied by the expected pension benefit at normal retirement age. Future pay increases are not included. This is a service-based approach that counts prior pay history as defined in the plan up to the date being measured and assumes that future pay remains unchanged.

Accrued Benefit Reduction: In a qualified ERISA defined benefit plan, a participant's accrued benefits normally may not be reduced. However, with special permission from the IRS and the PBGC, a plan amendment may reduce benefits already accrued. The operation of combined limits for an individual who is a simultaneous participant in two plans sponsored by the same employer can reduce an already accrued benefit in the pension plan. The reduction would depend on the terms of the two plans regarding which plan will suffer a reduction if the participant reaches the combined maximum allowed by pension legislation and IRS regulation.

Age: The valuation age of the pension plan participant is a vital element needed for determining the present worth of a defined benefit pension plan. There are four generally recognized methods of computing age for this purpose: (1) age last birthday - the person's actual attained age; (2) age next birthday - the age the person will be at the next birthday; (3) age nearest birthday - the person's age within six months, past or future (the age generally used in pension valuations); and (4) exact age - the person's age on the valuation date, in years and fractions of a year or months. The difficulty with the fourth method lies in entering a table of rates by age.

Age Misstatement: An employee's age is a critical element in determining the present value of a pension in a defined benefit pension plan. In one case, an individual who applied for retirement revealed that her true age was 65, not 55 as shown on her employment records. She had misrepresented her age when she was hired. Because the pension plan was small - only 19 participants - the plan actuary contended that the difference between the employee's true age and her reported age was actuarially significant and to the detriment of the plan. The pension plan postponed the commencement of the employee's benefits, relying on the "wrong" age shown on the plan books, and its action was upheld by the court. Nass v. Local 810 Staff Retirement Plan, 515 F. Supp. 950 (S.D.N.Y. 1981).

Age Proof: An employee misstatement of age affects the person's eligibility for retirement and the actuary's computations of the person's liabilities and contribution requirements. The following is a standard list of acceptable proofs of age for pension purposes: birth certificate, baptismal certificate or signed statement on church records, United States Census Bureau notification of birth registration, hospital birth record or certificate, foreign church or government record, attending physician's or midwife's signed statement, Bible or family record, certified naturalization record or immigration papers, military records or school records, passport, insurance policy, labor union certified records, voting records, and marriage license or certificate.

Aleatory: Refers to any risk, such as in insurance, or contingency, such as death or disability, that impacts the funding of a pension plan's ancillary benefits.

Alienation or Attachment of Pension: ERISA prohibits attachment, alienation, or garnishment of pensions. However, many states have laws that include pensions as marital property. Thus, when a state court serves an attachment order on a pension plan, ordering the plan trustee to make a payment of plan funds to a spouse, ex-spouse, or anyone who is not a plan participant, the trustee is caught between the requirements of state and federal law. Relief is offered by the Retirement Equity Act of 1984 (REA), which created the concept of a QDRO. A QDRO allows attachment if certain steps are followed, although a general creditor usually cannot attach pension benefits even in the case of bankruptcy. However, a Keogh plan or an IRA may be attachable in bankruptcy in some situations. An ERISA plan that covers only one employee, such as the owner of the company, may be vulnerable to bankruptcy attachment.

Alimony: Alimony considerations may be taken into account with a pension plan valuation or pension plan deferred distribution if so ordered by the court. The court may wish to consider the need for reduced alimony or none, if the pension's present value is used in immediate offset of other marital assets. For example, if the spouse who would otherwise receive alimony receives substantial property in lieu of a piece of the pension, there may be no need for alimony. If there has been immediate offset of present value plus alimony, the court should distinguish between the spouse's income with and without the pension to avoid a form of double-dipping. That is, once the pension distributions start it may be inequitable to include the pension as income for purposes of affordability of alimony payments if that pension has already been accounted for in an earlier settlement. However, in a Pennsylvania case, the court held that the ex-husband's pension income could be considered when determining alimony even if he was awarded the entire pension in the divorce. McFadden v. McFadden, 563 A.2d 180 (Pa.Super. 1989).

Ancillary Benefit: A plan benefit or coverage in a plan that is considered incidental to the larger program and the advantage or cost of which is not significantly material to the total program's advantages or costs. Even when a benefit adds significantly to the cost of a plan, such as an extremely generous disability benefit, the benefit is considered an ancillary benefit if it is not in and of itself a benefit that serves the primary purpose of the plan.

Annuity: A series of regular payments in equal dollar amounts, payable once a year for a predefined period. Most pension annuities are payable monthly rather than annually. Payments may be at the beginning of each payment period (the first day of each month) or at the end. The period of payments may be for the annuitant's lifetime, over the joint lifetime of two people, for a specific time period regardless of a person's life, or for a person's lifetime with a minimum number of guaranteed payments. An annuity may provide for death benefits with more than one beneficiary or for a death benefit payable only if a specific prenamed beneficiary is the survivor. A straight lifetime annuity is the most common form in a pension plan. It stops at the death of the retiree, with no survivorship benefits.

Annuity Contract

A policy purchased from an insurance company. The policy provides for annuity payments to an individual, with varying terms and conditions, in a certain amount, as stated in the contract. A pension plan may buy an annuity for a retiring participant in lieu of the pension fund making the monthly pension payments. The advantage is that the insurance company takes over all of the paperwork and administration and bears the mortality risk or gain. The disadvantage is that the pension fund must part with a large sum of money to buy the contract. If an annuity has been purchased by a plan for a participant, the annuity retains the tax shelter that the plan had, and the payments are taxable to the beneficiary as received. If a QDRO is in place before the annuity is purchased, the plan may purchase an annuity for the alternate payee as well as for the retiree. If a QDRO is ordered after the annuity is in place, the insurance company's legal department should be consulted to see if the insurer will administer the QDRO directly or if it requires the QDRO to be processed through the plan first.

Annuity Investment: The basic purpose of an annuity contract is to provide annuity payments in the future. However, insurance companies may market their annuity products as investment vehicles. A deferred annuity may be sold for a particular cash price today, with the annuity payments to commence at some future date, and with a minimum guarantee of tax-sheltered internal investment growth. The investment growth would increase the eventual annuity payout if such growth amounts to more than the underlying interest assumption of the basic annuity. The selling agent generally will emphasize the potential growth and recommend a lump-sum payout at maturity instead of a series of monthly annuity payments. In the early years, these types of contracts usually have high surrender charges and can be expected to cost more - i.e., have a larger purchase price - than a straight annuity contract. Conversely, a straight annuity contract promises an exact payout at the specified future date, regardless of investment performance. When pension plans use annuities, they are usually straight rather than investment annuities.

Antenuptial Agreement: An antenuptial agreement is presumed valid if it provides that the future husband and wife have fully disclosed to one another the extent of their assets and the extent of possible marital rights. Cooper v. Oates, 629 A.2d 944 (Pa.Super. 1993). The case did not involve a pension, but it raises the question whether potential pension rights and values should be mentioned in an antenuptial agreement. Should the document include references to ERISA if one or both of the prospective spouses are employed and covered by a pension plan? Should an actuarial valuation of prospective pension values be listed in the full and fair disclosure of possible assets? If neither party is covered by a pension plan prior to the marriage, should the agreement mention potential future coverage? Because court cases involving marital agreements leave many questions unanswered, the attorney in family practice should consider the potential pension issues in advising clients.

Assignment of Pension: In most cases, a retiree whose benefits are in pay status may assign or alienate the right to future benefit payments provided that (1) the assignment or alienation is voluntary and revocable; (2) the amount does not exceed 10 percent of any benefit payment; and (3) there is no direct or indirect defraying of plan administration costs. Although for federal purposes the assignment must be revocable, this is not always the case at the state level. For example, a pensioner in a nursing home in Pennsylvania signed over his pension benefits so that payments went to the nursing home. He was married, and his wife, who was also elderly, had no pension of her own. He sued for relief to provide one-half of his pension to the nursing home, preserving one-half as marital property. He argued that in the event of divorce, one-half of his pension would go to his wife. The court denied his request, affirming that the entire pension was available to pay for nursing home care and should be so used; a potential marital property interest that might become an asset in divorce is incidental and does not govern. Buck v. Commonwealth of Pa., 566 A.2d 1269 (Pa. Commw. 1989).

Back Loading: A benefit formula that gives more weight to later service in a person's career with the employer under the plan in a defined benefit pension plan. For example, the pension benefit may accrue over time at 1 percent of pay for each of the first 10 years of service, plus 1.25 percent for each of the next 10 years, plus 1.5 percent for the balance of years of service in excess of 20 years. In theory, any pay-based defined benefit pension plan may be thought of as being back-loaded under the assumption that a person's pay will increase with time and, therefore, later years of pension benefit will be based on higher pay amounts.

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