I am curious to know how most practitioners handle the calculation of a participants lump sum benefit. One method is using the participants age nearest birthday and discounting at the applicable interest rate based on the number of full years prior to age 65. Another method is to discount by the exact number of years and months the payment preceeds NRD. Generally the plan document is silent and only calls for the lump sum to be actuarially equivalent.

Any thoughts would be appreciated.

Generally we are using the exact years, months & days. We also give about a 3 month lead time to allow for time to obtain all of the required elections and to get the money distributed.

In our office, we usually interpolate all such issues on the basis of completed years and months. However, I believe this is ultimately an admininistrative decision; just be consistent once you make it.

It is pretty easy to defend your practice to anybody when you do it based on something pretty close to "exact". For that reason, I do not recommend using "age next birthday" or "age last birthday".

Note also that it may be OK to have different handling of service, because that is usually defined more precisely in the Plan. For example, service might be based on plan years, which in turn are based on the 1000-hour rule, even though you might calculate an early retirement reduction or optional form conversion based on age and months.

I agree with pax - we should be consistent within the plan (and follow the plan's language if it specifies how to make the calculatin).

However,Is this detailed calculation really worth the effort? Are you really being more accurate?

If you are so "precise" in lump sum calculations - that is, calculating to months or days - when using the mortality tables (which are developed using rounded approximations),
what do you do when an employee terminates one, two, three ...or 30 days after his normal retirement date? Do you adjust the monthly benefit for accruals after nra?

Actually Larry's question may not be so hard to deal with.

Whenever the EE terminates is what usually determines the amount of the Accrued Benefit. Then the commencement date is usually NRD (if it is a vested term) or the first day of the month following the last day on the payroll (if already eligible for retirement). That is, use the plan's definition(s) for this. Thus the lump sum is the actuarial equivalent of the Accrued Benefit. If the benefit should include an actuarial adjustment for late retirement, then use it first.