Rev. Rul. 81-11

1981-1 C.B. 227, 1981-2 I.R.B. 9.

                       Internal Revenue Service
                                 Revenue Ruling

          MINIMUM ACCRUED BENEFITS; FRACTIONAL RULE; BREAK IN SERVICE

                          Published: January 12, 1981

26 CFR 1.411(b)-1: Accrued benefit requirements

  Minimum accrued benefits; fractional rule; break in service. Examples illustrate calculation of the minimum accrued benefit required by the fractional rule of section 411(b)(1)(C) of the Code for a participant in a defined benefit plan who accrues a benefit in an accrual computation period following an accrual computation period following an accrual computation period in which the participant earned less than a full year of participation.

  Advice has been requested concerning the calculation of the minimum accrued benefit required by the fractional rule as set forth in section 411(b)(1)(C) of the Internal Revenue Code for a participant who has accrued a benefit in an accrual computation period after an accrual computation period in which the participant earned less than a full year of participation and where all the years of participation are taken into account.

  The fractional rule operates so that during any period of continuous participation, a participant will accrue the fractional rule benefit, as defined in section 1.411(b)-1(b)(3)(ii)(A) of the Income Tax Regulations, ratably over that period, and so that the entire benefit will be accrued at normal retirement age.

  Where an individual accrues a benefit in an accrual computation period that begins after an accrual computation period in which the participant was not credited with a full year of participation, the participant must accrue the fractional rule benefit which is attributable to the new continuous period of participation at least ratably over the new period.

  A method producing the lowest accrued benefit that will satisfy the above rules for determining the accrued benefit for a participant in such a situation is as follows:

    A participant's accrued benefit at any time equals the "fractional rule benefit" (computed in accordance with section 1.411(b)-1(b)(3)(ii)(A) of the Income Tax Regulations) times an "accrual ratio."

    The "accrual ratio" equals the sum of:

    (1) the prior "accrual ratio" at the end of the last accrual computation period (N) in which the participant was not credited with a full year of participation, and

    (2) the product of:

     (a) one minus the prior "accrual ratio" determined in (1) above, and

     (b) the fraction equal to the number of years of participation subsequent to N divided by the number of years of participation that the participant would have participated in the plan after N if the participant separated at normal retirement age.

  The application of the above rules is illustrated by the following examples:

Example 1

  An employee commenced participation in a plan at age 25.  The normal retirement age under the plan is 65.  The plan uses the fractional rule for determining a participant's accrued benefit.  During the first four accrual computation periods that the employee participated in the plan, full years of participation were earned.  The participant's "accrual ratio" at the end of the fourth accrual computation period was .10( 4/40 , the number of years of participation divided by the total number of years of participation divided by the total number of years of participation the employee would have participated in the plan if he separated from service at normal retirement age under the plan).

  During the fifth accrual computation period, the employee earned one- half of a year of participation.  Consequently, the participant's "accrual ratio" at the end of this accrual computation period was .1125 (4. 5/40).

  In the sixth accrual computation period, the employee earned a full year of participation.  At the end of this accrual computation period, the PARTICIPANT'S "ACCRUAL RATIO" WAS .1379 [.1125 + (1 - .1125) 1/35 ].  thus, if the employee completed 35 years of participation after the year in which a full year of participation was not earned, the participant would accrue the fractional rule benefit that is attributable to the new period of continuous participation [(1 - .1125) times the fractional rule benefit] ratably over the 35 year period, and at normal retirement age the entire fractional rule benefit would be accrued.  Consequently, the accrual rule under this plan produces the lowest accrued benefit permissible under the fractional rule.

Example 2

  The same facts are assumed as in the previous example except that for participants who have an accrual computation period in which a full year of participation was not earned, the participant's "accrual ratio" in subsequent years is a fraction, the

numerator of which is the number of actual credited years of participation (including partial years) and the denominator of which is the sum of the numerator as of the end of the prior accrual computation period and the number of years from such time to normal retirement age.  At the end of the fourth accrual computation period and at the end of the fifth accrual computation period, the participant's "accrual ratio" would be the same as in the previous example.  However, at the end of the sixth accrual computation period, the participant's "accrual ratio" is .1392 (the ratio of 5.5, the number of years of participation, over 39.5, the sum of the 4.5 numerator as of the end of the prior accrual computation period and 35, the number of years from such time to normal retirement age).  This method also satisfies the fractional rule because the participant's "accrual ratio" is always greater than the lowest "accrual ratio" that is permissible under the fractional rule.

Rev. Rul. 81-11, 1981-1 C.B. 227, 1981-2 I.R.B. 9.