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funding to the 415 limit at plan termination


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I have a client with a db plan who has reached age 62 and has a 415 max lump sum available to him (of $2.8M).  I'm not an actuary, so please bear with me.  I've been told that the maximum lump sum actually declines from age 62 to age 65.  Is that correct?

Also, the plan's about $500k short on assets currently.  The client is the 100% owner.  Do they still have substantial owner waivers?

Finally, if the client decides to fund the shortfall so that he gets his full $2.8M, does he need to do that all in one shot?  What if he wants to fund it over the next 12 months or so?  Do I have to worry about his 415 LS going down?

 

Thanks so much for your help...!!!

 

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21 hours ago, K2 said:

I've been told that the maximum lump sum actually declines from age 62 to age 65.  Is that correct?

Assuming your client already has 10+ years of participation and his 3-year-average salary is above $220k, this is correct. However you may gain some of this decrease back when the IRS issues new 415 $-limit.

21 hours ago, K2 said:

Do they still have substantial owner waivers?

Yes he can forego portion of his benefits upon plan termination.

 

21 hours ago, K2 said:

does he need to do that all in one shot?

He will need to fund by the distribution date based on the decreased lump sum that corresponds to his age at distribution.

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Pick your annuity start date, when the funds are available for lump sum payment.  It will decrease from 62 to 65 because the annual dollar limit will remain the same but the life annuity value will decrease with age.  Once you have your ASD, compute the limit for that date.  Delaying the date funds are available will decrease the amount payable.

You can and maybe should make sure the funds are available to make that distribution, but a couple of cautions. 

The benefit is eventually taxable, but is the contribution deductible?  If you have otherwise taxable income, you get a tax benefit from the contribution.  If not, don't make the contribution.

If you can make the deductible payment, do so, even if you have to borrow funds to make the payment.

 

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On 10/11/2018 at 3:37 PM, Mike Preston said:

Needs more to provide a complete answer.  Lots more to think about.  Many more nuances.  Repost after 10/15 if you want more.

Hi Mike... what more should i provide for a more complete answer?  i really appreciate your willingness to help.

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2 hours ago, K2 said:

Hi Mike... what more should i provide for a more complete answer?  i really appreciate your willingness to help.

Might be a while. Sorry, swamped.. Tap me again in a few days if I don't respond. 

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  • 1 month later...

 

On 10/11/2018 at 12:37 PM, Mike Preston said:

Needs more to provide a complete answer.  Lots more to think about.  Many more nuances.  Repost after 10/15 if you want more.

I think Calavera and SoCalActuary did a good job of answering. The only nuance I would add is that the 415 limit at some ages depends on the plan's actuarial equivalence assumptions.  If they have an impact on the 415 limit then selecting the actuarial assumptions which maximize the lump sum can be done at plan termination via a plan amendment (which would of course effect everybody in the plan). Remember that the 2007 415 regulations require that the 415 limit takes into account age in completed months.  Lots of moving parts.

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