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IRC section 415 limit


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Please help please.

I calculated x = $159,120 which is answer A.                                                                                       Based on the answer key form Joint Board, the correct answer is B.

DATA

Normal retirement age: 62.
Early retirement eligibility: Age 60 with 5 years of service.
Early retirement benefit: Unreduced accrued benefit.
Pre-retirement death benefit: Present value of accrued benefits.


      Plan assumptions:
           Interest rate 7%
           Mortality Applicable mortality under IRC section 417(e)


    Selected data for Smith:
        Date of birth 1/1/1956
        Date of hire 1/1/2006
        Date of participation 1/1/2007
        Date of retirement 1/1/2016
        Compensation for each year of service $178,000

   Selected annuity factors based on the mortality table:
        Interest rate        5.0%            7.0%
         ä60                    13.25          11.08
         ä62                    12.68          10.68


X = Smith’s annual IRC section 415 limit as of 1/1/2016.

Question: In what range is X?
(A) Less than $160,000
(B) $160,000 but less than $165,000
(C) $165,000 but less than $170,000
(D) $170,000 but less than $175,000
(E) $175,000 or more
 

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I get 160,200, which is probably wrong, wrong, wrong. I'm going to wait to see what those who actually know DB plans come up with, because I embarrass myself enough on these boards already, and I am decidedly NOT a DB person. I don't know how you actuarial types do it.

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I think the correct limit is $164,054.  This is the actuarial equivalent of the age 62 benefit (which is 90% of the dollar limit of $210,000) actuarially reduced to age 60 using the applicable mortality table and 5% interest).  AdKu, I think you reduced it using the 7% factors and Belgrath, I think you took 90% of the $178,000 compensation level.  The 100% of 3 year average compensation limit is reduced for service less than 10 years, not participation.  However, you would have gotten the question correct!  Mike

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.

Thank you Belgarath, Mike& Andy.

My understanding has been that 415(b) dollar limit is the lesser of the age adjusted dollar limit using the plan basis and mandated basis, correct me if I misunderstood my readings:

 

 Under §415(b)(2)(C) - DOLLAR LIMIT – AGE ADJUSTMENTS

 

If plan DOES define a straight life annuity at age 65 or annuity starting date the dollar max is the smaller of age adjusted dollar limit using

ü  Mandated basis (or Statutory Assumptions) to calculate actuarial equivalence under §415(b):

·         5% interest rate & 417(e) applicable mortality

ü  Plans basis to calculate actuarial equivalence under §415(b):

·         Plan interest rate & Plan mortality (or tubular plan factor, if applicable)

 

§1.45(b)-1(d)(1)(i) mentions using only the mandated basis if no benefit at either age can be paid as a straight life annuity under the term of plan.

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Thank you Calavera,

I forgot to look at how the early retirement benefit valued (Unreduced accrued benefit), my lack of deep understanding of the subject matter.

Again thank you very much until my next question.

 

 

 

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