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#1 Belgarath

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Posted 04 May 2011 - 08:26 AM

Ok, so a DB plan terminates. Question is, what happens to the lump sum limit for 415 purposes? Is it set in stone as of the plan termination date? If the distribution isn't made until a year or two later when the termination is finally approved, does it go up or down based upon participant's new age and/or changes to 415 limits, etc.?

Is there any formal answer to this, or only opinion? We're having a little informal discussion, and so far, it appears that there isn't any definitive guidance, only opinion.

#2 Andy the Actuary

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Posted 04 May 2011 - 08:44 AM

IRS has taken position that 415 applies to the determination of the accrued benefit. If you agree, then look to the Plan language to see if offers direction, and if not, you may want to make it so if/when the plan is restated for termination.
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#3 Belgarath

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Posted 04 May 2011 - 09:01 AM

ATA - thanks for the response. Pardon my ignorance, but are you saying that the value is "pegged" as of the plan termination date, or that it can change? And when you say "IRS has taken the position" - is this anything they have formally stated in some guidance? Or questoins from the podium, etc...?

#4 Andy the Actuary

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Posted 04 May 2011 - 09:28 AM

ATA - thanks for the response. Pardon my ignorance, but are you saying that the value is "pegged" as of the plan termination date, or that it can change? And when you say "IRS has taken the position" - is this anything they have formally stated in some guidance? Or questoins from the podium, etc...?

When the IRS discussed 415 (I believe at the 1998 EA meeting) just before issuing 415 guidance, they indicated that 415 applied to the accrued benefit, which is consistent with how the final regs. apply 415. In short, the plan should specify if accrued benefits are to be increased as a result of COL increases to the 415 limit.

I say, "If you agree," only because there are some legal beagles who are still willing to argue the statute trumps the regs. and that 415 applies to the benefit distributed. I, myself, would rather take my chances with Mike Tyson.
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#5 Belgarath

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Posted 04 May 2011 - 11:03 AM

Thanks Andy! This was very helpful, as I'm not an actuary, so I find some of these DB discussions challenging.

You obviously don't wear glasses, as you need your ears to hold up the glasses, and therefore Tyson might be a bad choice...

#6 Calavera

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Posted 04 May 2011 - 01:09 PM

Our current approach is to freeze the age 62-65 limit to the limit that corresponds to the year of plan freeze (usually the same as the year of plan termination). We will not provide the COL increases, but we will adjust limit to the age at the distribution.

#7 SoCalActuary

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Posted 04 May 2011 - 01:37 PM

If the issue is that the participant is at their maximum 415 limit, either compensation limit or the notch dollar limit between 62 and 65, then they will lose value of pvab as they wait for benefit.

The solution to this is to pay the annuity benefit during the period between plan termination and plan distribution.

#8 Effen

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Posted 04 May 2011 - 02:48 PM

The solution to this is to pay the annuity benefit during the period between plan termination and plan distribution.


Assuming the plan document permits such a form of distribution. Most plan's only give one bit at the apple and won't let you change from an annuity to a lump sum at a later date.

Personally, I think the 415 limit is determined at the time the benefit is paid, which may result in a lower lump sum than it was on the date the plan was terminated.
The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

#9 Belgarath

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Posted 04 May 2011 - 03:17 PM

Can it go up? If the lump sum maximum for the limitation year in which the plan termination date falls is, (pick a number)- $1,000,000, and the benefit doesn't get paid for 2 or 3 years, is the $1,000,000 still the maximum, or could it be higher if the maximum is then, say, $1,100,000?

Sorry if these are dumb questions.

#10 SoCalActuary

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Posted 04 May 2011 - 03:58 PM

The solution to this is to pay the annuity benefit during the period between plan termination and plan distribution.


Assuming the plan document permits such a form of distribution. Most plan's only give one bit at the apple and won't let you change from an annuity to a lump sum at a later date.

Personally, I think the 415 limit is determined at the time the benefit is paid, which may result in a lower lump sum than it was on the date the plan was terminated.


I agree. But then you better have suspension of benefit notices to the affected party.

#11 SoCalActuary

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Posted 04 May 2011 - 04:09 PM

Can it go up? If the lump sum maximum for the limitation year in which the plan termination date falls is, (pick a number)- $1,000,000, and the benefit doesn't get paid for 2 or 3 years, is the $1,000,000 still the maximum, or could it be higher if the maximum is then, say, $1,100,000?

Sorry if these are dumb questions.


415 lump sum limitations have a few different issues, including compensation history, year of benefit determination, form of payment provided, history of past distributions, years of active participation in the plan, years of service with the employer, the plan's actuarial equivalence assumptions, the IRS actuarial assumptions for lump sum determinations, and importantly, the age when benefits are paid.

With a plan termination, you may not increase the participant's accrued benefit to reflect future COLA adjustments to the 415 limit, but otherwise you still must provide the range of benefit options available in the plan until the benefit liability has been discharged. So a participant who does not have a constraint on their 415 lump sum would normally receive an increased actuarial equivalent benefit for later payment.

However, lump sums are also measured on 417(e) rates, and those produce less expensive lump sums in 2011 than in 2010.

You should go through the ASPPA educational materials on 415 limits if you want to have an informed discussion on this issue.