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Gary

lump sum distributions

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if a lump sum is paid out, but is under paid by say $ 10,000, what interest rate would you use to bring the underpaid portion forward with interest?

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There are two ways to look at this.

One is to say that the lump sum was underpaid by $X and bring $X forward with interest.

The other is to say that the lump sum represented only a partial distribution which is actuarially equivalent to $Y per month at retirement. Therefore, the participant still has an accrued benefit of $Z (=total accrued benefit less $Y) and is entitled to an additional lump sum which is the actuarial equivalent of $Z.

In practice, if the error is discovered relatively soon after the initial payment, the interest rate (if you are using option 1 above) is not particularly significant. Many practitioners use the actuarial equivalent rate. I've also heard a case made for the fund's actual rate of return.

I personally like option 2 since it avoids the need to select an interest rate (and then justify that choice to the participant).

If the error is discovered a significant time later, you may want to go in for a VCR ruling and, if you choose option 1, have the IRS "bless" your selection of interest rate.

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I agree with the use of the actuarial equivalent rate, however in the case of a lump sum, the twist is that that rate is often the PBGC deferral rate, not the rate in the plan for other options. So my follow up question is for a verification that using the PBGC deferral rate (probably 4%) is acceptable?

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The PBGC rates are one of the reasons I prefer recomputing the lump sum (option 2 above) to simply increasing the shortage by an interest rate. I don't feel I could justify (except maybe in the last few months) assuming a 4% rate of return on assets as making the participant whole.

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It sounds like option 2 is really recomputing a lump sum based on the plan provisions w/r to lump sums as of date of corrected distribution. It seems like you suggest using an interest rate equal to act equiv in plan is better than PBGC, if the period is over say 6 months. Bottom line, is the choice of interest rate really a judgement call by actuary recomputing plan benefit?

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Since benefits must be definitely determinable, I don't feel comfortable in saying the interest rate is the actuary's choice.

If I am put in the situation where option 1 is the option the Plan Administrator decides to use, I make the Plan Administrator interpret the plan and tell me the rate.

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I think there is another issue: why was the lump sum underpaid?

If it was because of a clerical error or a data correction, I suggest recalculating based on the correction and bring the difference forward with interest.

If the underpayment was due to some other reason, such as a retroactive plan amendment, perhaps the answer is not as clear. However, my practice would be to use the same process of recalculate the benefit at the original date.

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Pax, You point makes sense. It is a correction and bringing forward with interest seems reasonable, we are also trying to establish an appropriate interest rate, such as act equiv., or lump sum rate or some other rate.

Thanks for your response.

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