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Lump sum distribution - administrative delay


Guest Bearlee

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Guest Bearlee

I have a plan where the plan document states the benefits commencement date (presumably the annuity starting date) is the 1st of the month following the retirement date.

But for lump sum distributions (due to true up by TPA and actuary, election form processing time, and that payments are only made on the first and fifteenth) in actuality it could be as many as 60 days after the retirement date before the participant receives his/her check.

Participants are now asking for the back interest for the 60 or so days in which the benefit distribution is being processed. Do participants have a right to this interest when seeking lump sum form of distribution? Is the annuity starting date the DATE OF DISTRIBUTION, meaning there is technically no administrative delay when a lump sum is provide?

I have some support for this notion that there is no administrative delay (and therefore no interest earnings need be paid) from Clevenger v. Dillard's Dept. Stores, 41 EBC 2705 (2007). The court held that the annuity starting date = date of distribution for lump sum forms. But I can't tell for sure how it arrived at that conclusion -- it did mention the PBGC regs, but I don't think its holding was based on that as the argument was in a last minute brief by one of the parties. I think its holding was based on the Treas. Regs. re: administrative delay in 1.401(a)-20 Q&A-10(b) and how the Regs. were silent about any kind of delay for lump sum forms.

Another case, Stephens v. Retirement Income Plan for Pilots of U.S. Air, 464 F.3d 606 (6th Cir. 2006) seems to militate for the notion of requiring plan sponsors to pay interest while participants wait for their distributions to be processed after their plan document designated retirement date (although the court never got to the merits of whether the participant actually deserved interest - just that it was remanded for jurisdictional reasons).

As always, thank you for your input -- this is truly a great resource.

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Participants are now asking for the back interest for the 60 or so days in which the benefit distribution is being processed. Do participants have a right to this interest when seeking lump sum form of distribution?

Are you sure the lump sum does not already have an interest adjustment included?

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 Bearlee
Participants are now asking for the back interest for the 60 or so days in which the benefit distribution is being processed. Do participants have a right to this interest when seeking lump sum form of distribution?

Are you sure the lump sum does not already have an interest adjustment included?

I have to ask the actuary about that.

But isn't that part of the concern - that plan sponsors could time the distribution so that there is a favorable annuity starting date for purposes of the 417(e) applicable lump sum interest rate -- esp. when the retirement is at or near the plan year ending date whereupon plan sponsors could be in a position to choose their applicable interest rate?

Thanks for responding.

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Why not give them the first number as an estimate along with the wording that if the payment is not made by specific date the amount will be recalculated?

That is what we do. I won't send out any lump sum paper work unless the payable date is at least 45 days in the future. That way we don't have to redo quite as many.

JanetM CPA, MBA

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I think you'll find that 417(e) doesn't refer to the annuity starting date but rather to the distribution date, to prevent the shopping for rates. Thus if you move into another stability period during your delay, you are generally required to recalc based on the updated rates.

Failure to provide interest for the delay period could cause the benefit paid as of the distribution date to be less than the actuarial equivalent of the Normal Retiremnt Benefit which would be impermissible forfeiture under 411(a). The IRS doesn't want any part of rules for this, however, which is why the RASD regs provide that for retroactive payments of any sort an appropriate interest adjustment must be made, without any indication of what the heck that means. Of course your payment here is not a RASD payment, technically, and the RASD rules are not clear how long the delay must be before it triggers an appropriate interest adjustment (some believe that for, short periods, zero is appropriate); but the thought process is essentially the same.

One way to look at it would be to consult the actuary as to how age is calculated for purposes of 417(e) distributions in your plan. Is it age to the nearest year? Exact age? Nearest month? Nearest quarter? This will allow you to determine if there was interest discount for the period of time in the delay and if so, an interest increment would seem appropriate. If the participant went from being 57 and 7 months to 57 and 9 months in a plan that rounds to the nearest year however, the lump sum recalc'd at the distribution date would be exactly as it was at the original ASD and no adjustment would be necessary

( I won't opine on whether I believe age nearest year is proper for benefit calculations, but it is not uncommon)

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