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Plan is funded between 60% and 80% thus limiting their 100% lump sum option to 50%.  A top 25 employee's 50% lump sum is below 1% of the funding target (100% would be above 1% of funding target).  The Plan's ERISA attorney is saying this 50% lump sum can be distributed since the 50% lump sum is below 1% of FT.  

This doesn't seem right since in this case, for example, a plan funded at 78% would allow a 50% lump sum in this situation whereas a plan funded at 82% would allow no lump sum.

Thoughts? 

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The 436 and top 25 rules are independent.  If one is satisfied that does not mean the other may be ignored.

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I would agree that they are clearly independent.  But the real question is what "benefit" is measured against the 1% exception.  The 50% lump sum benefit or the full value of the benefit?   The attorney seems to be arguing the 50% benefit and this seems counter intuitive to me.

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Obviously the actual plan language is critical, but I can see an argument in favor of the attorney's position from IRS LRM language which arguably defines "benefits" as benefits being paid in a lump sum form.

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I would argue that there is initially one election - a lump sum - and then you see (independently) if permitted under the top 25 restrictions (401(a)(4) I believe) and under the 436 restrictions. In this case, I think 401(a)(4) precludes the lump sum.

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The regulation refers to the "value of the benefits payable to or on behalf of the restricted employee" so I'd say the measurement takes into account both the partial lump sum and the value of the remainder annuity. 

This is similar to the situation with a QDRO.  You evaluate the two pieces together.

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I don't disagree with the last two view points, but I just think there is a possible argument the other way so I would defer to plan counsel if that is an informed judgement.

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