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Benefits subject to 417(e)(3)


Guest PensionNW

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Guest PensionNW

Section 415(B)(2)(E)(ii) mentions benefits subject to section 417(e)(3).

Reg. 417(e)-1(d)(6) says: "This paragraph (d) (other than the provisions relating to section 411(d)(6) requirements in paragraph (d)(10) of this section) does NOT apply to the amount of a distribution paid in the form of an annual benefit that - (i) Does not decrease during the life of the participant, or, in the case of a QPSA, the life of the participant's spouse"

So just what benefits (besides a lump sum and an annuity certian without any life provision) are subject to 417(e)(3)?

Is 10C&C subject to 417(e)(3)?

What about 50% J&S with 120 monthly payments certain?

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Guest Harry O

Both of these benefits do not decrease during the life of the participant. A social security level income option is an example of one such benefit that decreases during the life of the participant and is subject to 417(e)(3).

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Guest PensionNW

That's what I thought.

So 10C&C is not a straight life annuity (as defined in 1.415-3©(1)(ii) but since it does not decrease over the life of the participant, it is also not subject to 417(e)(3).

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Any distribution that contains a partial lump sum is also subject to 417(e).

Many contributory plans will allow the participant to remove their employee contributions upon retirement. This would subject any form of annuity chosen to the 417(e) rates. For example, if the person received a partial lump sum and then chose a J&S (or certain and life), then the resulting annuity must be at least as great as would be produced by using 417(e) conversion rates.

Also, ANY temporary amount (not just SS leveling) would subject it to 417(e) rates. An example is an additional benefit to help pay for medical premiums. Note that the entire payout (including the underlying annuity) is subject to 417(e), not just the temporary amount (note in the above discussion of a partial lump sum that it is just a temporary amount that only happens to last for one payment).

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Guest Harry O

MGB -

Your reference to payments for medical benefits is interesting. I have seen a number of plans that provide "Medicare Supplements" to retirees age 65 +. I've always wondered how these payments were even allowed under a qualified plan. Since most plans treat these medical payments as non-taxable medical reimbursements, I would think it would be consistent to ignore their existence for purposes of all the accrued benefit rules (including 417(e) valuation).

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Actually, I beg to differ on the applicability of 417 to SS offsets. From the proposed 1.417(e)-1T(d)(6) regs:

(6) Exceptions. This paragraph (d) (other than the provisions relating to section 411(d)(6) requirements in paragraph (d)(10) of this section) does not apply to the amount of a distribution under a nondecreasing annuity payable for a period not less than the life of the participant, or in the case of a QPSA, the life of the surviving spouse. A nondecreasing annuity includes a QJSA, QPSA and an annuity that decreases merely because of a cessation or reduction of Social Security supplements or qualified disability payments (as defined in section 411(a)(9)).

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A SS supplement (which is given a special rule) and SS leveling options are two different things. There is no special rule for SS leveling options.

The distinction is that the SS leveling option is not a supplemental benefit. It is the actuarial equivalent of the benefits otherwise obtainable. The SS supplement is over and above the other benefits accrued.

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Hmmm. I had a recent variation on that. Sponsor created a temporary early retirement window, vanilla in most respects, add 3 years of service, waive early retirement reduction (except as needed under permitted disparity safe harbor). The variation is that the sponsor decided to give the accepting employees an additional plan benefit for 3 months equal to the monthly salary prior to retirement. Would this require the use of 417 rates for determining the optional forms?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest Harry O

Using the section 417(e) assumptions for optional forms may not be terribly problematic. Remember that you would need to use it to make sure that any optional form is at least equal to the NORMAL retirement benefit. If you have early retirement subsidies, for example, you compare (a) the benefit under the plan at early retirement (with subsidy) to (B) the benefit payable at early retirement (converted from the NRB without subsidy). In most cases the plan benefit under (a) is larger and this makes the whole 417(e) exercise meaningless as a practical matter. But you need to check the terms of the plan as it relates to each optional form.

DISCLAIMER: I am not an actuary so this is just my understanding of how things work!

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about ss level options. i haven't looked this up, but my impression is that the ss level benefit s/b act equiv to the normal form based on plan act equiv and that 417(e) would not be applicable in this case.

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