Jump to content

Impact of COLA on lump sum


Recommended Posts

A plan provides an annual COLA. A participant chooses the lump sum option. Is the COLA typically included? The plan does not explicitly state one way or the other. is there any feeling as to which is appropriate or what the default would likely be?

Link to comment
Share on other sites

Guest Steve C

I believe that the value of the COLA should be recognized in the lump sum.

A few years back someone provided the following extract from the IRS Training Manual (Rev. 12/95):

"Where a plan formula provides that a participant's benefit is increased each year by a COLA which is a function of the [CPI], a participant receiving their benefit in the form of a single sum must receive projections of the CPI increases (based on reasonable actuarial assumptions) as part of their single sum, but only to the extent that the single sum does not exceed the actuarial present value of the lesser of the current [iRC 415] dollar limitation or current [iRC 415] compensation limitation applicable to the participant."

I've heard that there are also supporting court decisions, but I don't have cites.

Link to comment
Share on other sites

I agree with Steve's synopsis. I think there is some flexibility with respect to the assumption for those future COLA's, but recommend defining a method, such as looking at 30-year treasury rates, etc. Of course, the plan may establish some mechanism for this already.

Be consistent in the application of the method. Write it down.

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.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...