415 limits precision

[FAPInJax]

I have a plan where the participant has a NRD which is 2 months prior to his 62nd birthday (don't ask why the document is drafted like this but it is<GGG>).

Question:

Can an actuary perform a valuation and use age 62 (no reduction in the 415 limit) for funding purposes OR must the exact limit be used??

Obviously, the opposite problem could occur where the age 61 limit is being funded for BUT the participant is entitled to 61 5/12 (that is another issue)

IF the exact limit is to be used, administratively how are others determining this?

Calculate 61 and 62 limits and prorate between them

Adjust the factors to compute actuarial equivalent numbers at 61 8/12

Thanks for any and all input.

[Mike Preston]

Technically, it must be the exact age. Of course, what does "exact age" mean in this context, anyway? To the nearest month? To the nearest week? To the nearest second?

I have seen calculations based on age-nearest and on age-last and those calculations have been accepted by the IRS in connection with a letter of determination application on plan termination. So, I think it heavily depends on the reviewer you get.

If you won't be happy with the reviewer reaching a conclusion not wanted, maybe it is best to avoid giving the reviewer a chance to be unhappy. However, if that reviewer is a determination letter reviewer rather than somebody reviewing the records of the plan in a "field examination" (slang for "audit") you have the opportunity to modify.

[rcline46]

I think you are faced with 2 problems, funding and distribution.

For funding, a 'reasonable' benefit need be produced, so the 'nearest whole year' benefit should be quite acceptable.

For distribution, the benefit must be calculated exact - ok nearest month is exact enough considering the 'old' pre SSRA reduction factors.

The concern is the tendency to use the 'funding' benefit for benefit distributions, because who wants to recompute benefits by hand?

[rcline46]

I think there are two concerns, funding and distribution.

For funding, the benefit needs to be reasonable, and a 'full' age should be reasonable.

For distribution, based on the 'old' SSRA reduction factors, calculating to the month should be exact enough.

The concern is that one tends to use the 'funding' benefit for the 'distribution' benefit because who wants to calculate it by hand?

[mwyatt]

As far as funding goes, one observation would be if you were to use exact month for the benefit, you should also make modifications to your immediate annuity factor (inconsistent say to use a limit/benefit calculated to 61 and 10 months while using an age 62 nearest year annuity factor).

Benefit distributions would use exact month calcs.

[Mike Preston]

Reed, I've heard of short term memory issues before...... ;-)

[Blinky the 3-eyed Fish]

Just curious, but what do you think about the validity of calculating the maximum lump sum limit based on an annual annuity using age last?

For example, a participant is 60 7/12. The dollar limit is reduced to age 60 using APR's for annual payments, not monthly. The lump sum value is also determined using an APR for annual payments as well.

[Mike Preston]

Well, you won't be violating 415, will you? Might you be underpaying the participant?

[Blinky the 3-eyed Fish]

The numbers speak for themselves:

Lump sum using a monthly annuity (assuming the Applicable Interest Rate is below the plan rate and not a factor for this calc and AE are 94 GAR 5%)

160,000 * 12.679776/13.085646 * 1/(1.05^1 5/12) = 144,683.24

144,683.24 * 13.085646 = 1,893,274

(Yes, I see the shortcut, but dragged out the calc for illustration purposes)

Lump sum using an annual annuity

160,000 * 13.138109/13.709153 * 1/(1.05^2) = 139,179.66

139,179.66 * 13.709153 = 1,906,664

Mike, see how the annual annuity will often produce the higher amount. It may not as the person gets closer to age 61 in this case.

[MGB]

Isn't there a rule that if the payment is any frequency other than monthly, that you must adjust the dollar maximum?

[Mike Preston]

MGB, no there is not. You are thinking of the rules associated with, first, 71-446, and then the non-discrimination regulations. But as to 415? Never. It has always been the amount payable as an Annual Annuity.

[Mike Preston]

The numbers speak for themselves:

Lump sum using a monthly annuity (assuming the Applicable Interest Rate is below the plan rate and not a factor for this calc and AE are 94 GAR 5%)

160,000 * 12.679776/13.085646 * 1/(1.05^1 5/12) = 144,683.24

144,683.24 * 13.085646 = 1,893,274

(Yes, I see the shortcut, but dragged out the calc for illustration purposes)

Lump sum using an annual annuity

160,000 * 13.138109/13.709153 * 1/(1.05^2) = 139,179.66

139,179.66 * 13.709153 = 1,906,664

Mike, see how the annual annuity will often produce the higher amount. It may not as the person gets closer to age 61 in this case.

Ah, but what language are they speaking?

You are comparing (A) to (B) and since (A) is bigger than (B) you are reaching a conclusion that (A) is "too big". But (A) shouldn't be compared to (B). (A) should be compared to ©. (A) will always be less than ©.

In this case:

(A) the amount payable at 60 using annual rates:

$139,079.67 * 13.70915 = 1,906,664.06 (this matches yours)

(B) the amount payable at 60 and 7/12 using monthly rates (I get a slightly different number because the program I have available to me while reading this message interpolates 415 dollar limits between integral ages rather than use exact actuarial equivalence)

$144,932.73 * 157.02776 / 12 = 1,896,538.50 (this is about $3k bigger than yours - close enough for now)

© The amount payable at 60 and 7/12 using annual rates:

$144,932.73 * 13.54398 = 1,962,966.00 (this is the real 415 limit)

[Blinky the 3-eyed Fish]

I wasn't saying (A) was too big.

Can you provide the math behind your determination of $144,932.73? Your purchase rate of 157.02776 matches my interpolated number.

Can you provide the source of 13.54398? I can't tie out to that.

Nevermind on the 13.54398, I got it

I am sure I will have a question after your response.

P.S. Are you on vacation yet?

So, you are calculating the dollar limit using monthly rates and multiplying the equivalent annual benefit by an annual purchase rate. I have never seen this done before. You say it's a program you are using? I feel the need to ponder this.

[Mike Preston]

I don't think there is much difference between using the monthly rates or the annual rates in determining the monthly benefit payable at an age lower than 62, is there? The key is that the benefit of $160,000, payable at age 62, is multiplied by the "annual" APR to determine the 415 limit at age 62. Once you start there, you will find that the 415 limit at other ages should similarly be about 5% higher than what you would get if you just multiplied the monthly benefit times the monthly APR.

No, not on vacation yet. And only 2 or 3 more 1/31's to do. :-(