Rehire, Break in Service, and Early Retirement Eligibility
Marta Ruiz was hired by Cedar Fabrication on March 1, 2005, and worked continuously until she terminated on June 30, 2014. Cedar's defined benefit plan uses a formula of 1.5% of final average pay for each year of benefit service, a normal retirement age of 65, 5-year cliff vesting, a 1,000-hour year, and the standard break-in-service rule. Marta had 9 vesting years when she left and was fully vested. Cedar rehired her on January 15, 2021, after a 6½-year break. She worked more than 1,000 hours in each year from 2021 through 2024 and had more than 1,000 hours by June 30, 2025. Her high-five consecutive-year average pay is $72,000. On June 30, 2025, at age 63, she requests an early retirement benefit. The plan's early retirement provision requires age 55 and 15 years of service and reduces benefits by 0.5% per month before age 62. The plan permits deferred vested participants to commence at age 63 on an actuarially equivalent basis.
1. How many years of vesting service and benefit service should Cedar credit Marta, and how does the break-in-service rule affect that answer?
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Because Marta was fully vested when she terminated, the break-in-service rule does not forfeit her pre-break service. IRC §411(a)(6)(C) permits a plan to disregard pre-break service for vesting only if the participant was not vested and the break equals or exceeds the greater of five years or the pre-break service. Neither condition applies to a vested participant. Cedar must therefore count the 9 pre-break years for vesting and benefit accrual, assuming the plan uses the standard rule and has no more restrictive, legally permitted provision.
The post-rehire years 2021, 2022, 2023, 2024, and 2025 each satisfy the 1,000-hour requirement, so they add 5 years. Total credited service is 14 years. The administrator should confirm the plan's precise service-crediting definitions, because elapsed-time and 1,000-hour plans can treat the partial 2025 year differently, but on these facts the expected credit is 14 years.
2. Is Marta eligible for the plan's early retirement benefit at age 63? If not, what benefit can she receive and how is it calculated?
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She is not eligible for the subsidized early retirement benefit. The plan requires both age 55 and 15 years of service; Marta is 63, but she has only 14 credited years. The age-55/15-year provision is an eligibility condition, not a facts-and-circumstances test, so the administrator cannot waive it.
Her normal retirement benefit at 65 is 14 × 1.5% × $72,000 = $15,120 per year, or $1,260 per month, payable as a life annuity unless the plan's default form applies. Because the plan permits deferred vested participants to commence at 63 on an actuarially equivalent basis, she may elect an actuarially reduced benefit now. The administrator must apply the plan's stated actuarial equivalence assumptions, not the 0.5%-per-month early retirement reduction, because that reduction applies only to the early retirement benefit she has not earned. The exact age-63 amount requires the plan actuary's factors.