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New 415 Lump Sum Calculation


Guest csk

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If a Plan has NRA of 62 how is the maximum lump sum calculated as of age 55 assuming participant has average compensation over $200,000?

1. 165,000 times annuity value at 62 (5.5% interest) discounted to age 55 at 5.5% interest; or

2. 165,000 reduced to age 55 (greater of Plan rate or 5%) then multiplied by annuity at 55 (5.5% interest).

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Technically neither, although #2 could end up being correct.

The only thing that has changed as it relates to calculating maximum lump sums is that the previous use of the 417(e) rate is replaced with 5.5%. Thus, you still are calculating the dollar limit at distribution age comparing the value using the plan's AE and 5%/94 GAR. Then multiplying that figure by the lesser of the plan's mortality factor or the 5.5% 94 GAR factor.

In your #2 example, you excluded the plan's AE consideration.

Also, remember there is the transition rule for 2004.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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I'm among the dense people who have not yet figured out exactly what changed and why with the 5.5%. Would Blinky or someone else mind giving a simple example (or 2) of the maximum lump sum based on the following:

Applicable GAR rate 4.9%

Plan actuarial equivalence for monthly payments 7%, UP84. Lump sum computed as greater of GATT/GAR or plan rate 7% (UP84).

No preretirement mortality

Participant age 54

NRA age 62 and a second example NRA age 55.

Thanks.

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Here it is:

First, the retirement age doesn't matter, but rather the age at distribution. So, I will prep an age 62 and age 55 example. Also, I am just showing my take on the new law and not factoring the transition rule for 2004. I am also assuming the compensation limit is not a factor, the participant has 10 years of participation and there is no way the old-law benefits under Rev. Rul 98-1 are a factor.

Age 62

165,000 (unreduced $ limit) * 9.852332 ( AE UP 7% annual rate) = 1,625,635

Now this would also be compared (and the lesser taken) with the 5.5% rate and 94 GAR mortality, but since AE are so high, it's obvious that the AE amount is less.

Age 55

165,000 * 9.852332 / 11.240920 (age 55 AE factor) * 1/(1.07^7) = 90,060.57

This would be compared with 5% interest and 94 GAR, but again it's obvious that the AE reduced dollar limit is less.

90,060.57 * 11.240920 = 1,012,364

(corrected the typo pointed out below)

(Repeat) Now this would also be compared (and the lesser taken) with the 5.5% rate and 94 GAR mortality, but since AE are so high, it's obvious that the AE amount is less.

Help any?

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Yes, thank you very much. I was confused by comments I've read welcoming this change, therefore assuming that it somehow increased the maximum lump sum. That is what I couldn't figure out.

But a (potential) decrease is being applauded. Go figure. Everything goes in circles.

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What was being applauded was the original suggestion by ASPA, which is not what ended up in the law. They (and others) wanted to remove all references to floating assumptions and lock in a fixed table based on 5.5%. The fact that some calculations may end up slightly smaller was offset by the added simplicity and communicability of a fixed maximum at each age. Unfortunately, the message was garbled by the time it became statutory language and what is in the law is not what was lobbied for. Even stranger, all of this was pointed out to Congress prior to passage, but they refused to change the errant language.

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I would have been thrilled to get 417(e) under control for minimum lump sum values. I can't tell you how many times I am asked by the owner what an ancillary person's value is in a DB plan. My response is filled with caveats because who knows what the 417(e) rate will be at the time of distribution.

They could have even had a nice transition rule for 2004 or a wear-away approach based on current rates. Arg!

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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I'm probably more dense and more confused than Andy, but i was able to follow the exampes. I would just like some confirmation (or correction) that for an employee who will not be at their 415 limit, the minimum lump sum is still calculated using 417(e)(3) rates. Thanks.

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Guest lerieleech

Blinky,

I really appreciate your efforts. This has helped me a great deal.

One thing though... in the last part of your age 55 calc, shouldn't the age 55 conversion factor be used?

In other words, should't it read, "$90,060.57 * 11.24092 = $1,012,364"?

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