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436 restricted lump sum issue


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Plan has an AFTAP of 70% and is comprised of two components (1) a traditional benefit that does not have a lump sum option and (2) an account balance type benefit that has a lump sum.

Assume a participant has a traditional benefit of $200,000 per year plus an account balance of $15,000.   Participant elects an annuity from the traditional and a lump sum from the $15,000.  Can the $15,000 be paid or is it restricted to $7,500 under Section 436?

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Suppose you are talking about a traditional defined benefit plan converted prospectively 2 or 3 years ago to have all new accruals under a cash balance formula.  A participant with 20+ years of service has a grandfathered traditional benefit of $20,000 per year (worth $200,000) and a cash balance of $15,000.  It is my understanding that one can pay up to half the value (assuming the PBGC guarantee limit is not applicable) in an accelerated form.  If the annuity forms for the traditional benefit are not subject to restriction, it would be acceptable to permit the participant to cash out the $15,000 and take the rest as a non-accelerated annuity.  The 436 limits do not apply to components separately. 

Of course,  the answer would be different if the amount subject to cash-out was worth more than half, the traditional benefit could be taken in a form subject to 436 restrictions (i.e., as certain only or level payment options) or if the AFTAP were below 60%.

Always check with your actuary first!

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Yes, the 436 restrictions apply to the accrued benefit in total, not the traditional and cash balance benefits separately, so in this case the $15,000 lump sum is well below the restricted limit.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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