joef

Peter, thank you for the insightful citations! Joe F

If the plan says monthly benefit and does not provide an annual annuity option (check the specific RMD provisions too which may give additional options), you're stuck with what the plan says and must pay monthly benefits. (So the answer is that neither 18K nor 24K is permitted. Only if the Plan permits an annual annuity can you pay out an annual form of pmt. And even then the amount must be actuarially determined, and it will be somewhat LESS THAN 24K but not exactly 24K.) There are a lot of unknowns here. Is the $2000 monthly amount actuarially adjusted from Normal Retirement Date to the 4/1/23 starting date per the terms of the Plan? Same for the accrual for 2023--it must be adjusted to whatever starting date for the increase. Probably the easiest thing is to start the increase on 1/1/24 though you might be able to start the increase 4/1/24 (appropriately actuarially adjusted)--but check the terms of the plan as to what is permitted or required. DB RMDs are messy. That's why I always design my plans with annual annuities permitted for RMDs, and frequently use an in-service distribution as a means to both simplify the RMD process and to simultaneously de-risk the plan at the same time. And maybe capture maximum 415 limit benefit too. And don't miss the 4/1 start date! They are focused on it now so no excuse. Excise tax will apply. (Does Secure 2.0 reduce the excise tax this year or at a later date??)

Jeff, I agree with your ballpark L/S calc--I would actually get at least 2000 * 136 = $272K (estim.). Then this amount L/S amt is subject to RMD requirement by dividing by 27.4 = $9927 and the rest of it could be rolled over to IRA.

If plan permits, s/he could take an annual annuity form, so a little less than 12x the monthly benefit (actuarially determined based on annual annuity factors). The 9x (etc.) multiplier does not satisfy equal payments requirement. If s/he is eligible for in-service distrbs under terms of the plan, then electing a lump sum might be an option. Most of the L/S can be rolled over to IRA or PSP, with RMD portion (must be distributed instead of rolled over) calc'd under modified DC rules. Look for Single Sum distrb rules in 1.401(a)(9)-6.

I've already checked the Datair Standardized AA and Base Doc and these permit the election of the Limitation Year and the Compensation Computation Period as I specified in #2 and #3 above without considering Short/12 month PY. So that seems favorable. Also, these 2 IRS bulletins have relevant discussion on both compensation and 415 limits for Short PYs: https://www.irs.gov/retirement-plans/issue-snapshot-treatment-of-401a17-limitation-in-defined-contribution-plan-in-a-short-plan-year https://www.irs.gov/retirement-plans/issue-snapshot-treatment-of-415c-dollar-limitations-in-a-short-limitation-year

Thanks Truphao. My understanding is that Sole-Props have always been able to adopt a 401k on 12/31/YY and immediately make their "election" (for up to max deferral), subject to the finalized calculation of their limits based on finalized calc of Considered Compensation (which may actually happen as of 10/15/YY+1). I think the reasoning is that their income is not established until 12/31/YY, and even then subject to many computations that take place after that date. I'll leave it to the forum to either confirm, clarify, or correct my understanding and explanation on that point! Anyway, on that basis, I think the principle would be the same for the proposed SHORT PY--with the compensation period duly defined as above. One additional thought in support of my original proposal: it appears the intent of congress was to make this provision available ASAP because they explicitly made the effective date "after 12/29/22"; if they wanted the impact of of the section delayed to 2023 PYs they could easily have made the effective date "after 12/31/22". However, code writers are clearly not practitioners, so it didn't occur to them that it might present a challenge to implement the new rule for 2022 Plan Years.

Under SECURE 2.0 section 317, a Sole-Prop can RETROACTIVELY elect to defer for a new startup 401k for PYs beginning after 12/29/22. Normally I would think that means “for 2023 PYs”, but could the following work: Initial SHORT PY = 12/30/22 – 12/31/22 Limitation Year = calendar year ending within PY Compensation Computation Period = calendar year ending within PY Therefore elect to defer full 20.5K/27K for 2022 PY fully deductible for 2022 Tax return. (+ PS alloc up to 415 limit, which is NOT prorated since Limitation Year is full 12 months, as well as Comp year; this part was already available for retroactively adopted plans I believe) I’m a pension actuary obviously trying to think outside the box and there may be other boundaries that can’t be crossed that I am not thinking of. 401ks are not my forte.

Did you come up with a solution? We have a similar situation and need to transition a batch of 70 or so plans.

There is no minimum offset, but the offset should be Uniform in order to test 401a26 pre-offset. The 5% is simply a convenient level in order to pass TH minimum benefit requirements.