Effen

Since you are in the defined benefit board, I assume this is a DB plan? Will it be a traditional plan or a cash balance plan? Regarding your questions: 1) There is no "RMD for the un-vested portion". Assuming it is a traditional DB, you would just pay the Accrued Benefit in accordance with the MRDs once he becomes vested. Non-vested benefits are not subject to MRDs. 2) It looks like a number. Probably with 6 digits to the left of the decimal.

Not sure I understand the context of your followup question. Why would you think that would matter?

In all things, do what is reasonable and consult with the fund's attorney. Is this a traditional DB? If so, I would offset the current benefit (determined with all service) with the AB based on pre 2000 service. I don't think I would mess around with converting from the lump sum unless I didn't know what the basis of the original lump sum was. If you know the AB used to determine the original lump sum, then just use that as the offset. If you don't know the AB used, I would use the AE from 2000 to reconstruct the AB. If you used the original AB as the offset, I don't think question 1 is possible.

First thought is to ask fund counsel. They, along with the Trustees, should be the ones to decide how to handle this. Obviously the 70 1/2 is a problem for the participant, but I don't really think it is the fund's problem. Most likely, nothing bad will happen, but if so, that is on the participant. The plan document should dictate what is to be done, but there are typically two possibilities. First, you pay him retroactively to 1998 - maybe with interest, maybe without. (I would argue with interest.) Second, you determine the actuarially increased monthly benefit commencing 12/1/15 (or some other future date). I think an actuarial increase would be cleaner. You know your options and his current spouse and you present the options like any other late retirement. If you use the retro approach you might need to be concerned with his spouse as of 1998. What options would have have had available at that time? The document must contain retroactive annuity payment provisions, but some attorneys take the approach that the plan had no authority to suspend the payments for a terminated member, therefore the retro payment is the only option. At the very least some adjustment needs to be made to the benefit. Some attorneys will argue the participant had an obligation to request the payment and not doing so eliminated the sponsors obligation to adjust the payment, but I believe the IRS has been clear that this isn't true. Bottom line, there is probably no perfect answer, so do something reasonable that you can defend later if necessary. You can't really do anything about the 70 1/2 problem, so I wouldn't give it much thought.

Metlife, Pacific Life, Mutual of Omaha, MassMutual and Prudential are generally the main players. You should be able to google each and find out who to contact for single premium annuities. If you have trouble, I can give you some contacts off line. I am sure at least a few of these would quote on something of that size. Generally, getting them to quote on a retiree only group is fairly easy. Getting them to quote on anything with deferred annuities is virtually impossible. Assuming you are not an insurance broker, just make it clear that you are just assisting the sponsor with the purchase. There should be no problem with that arrangement, in fact, I have heard they often prefer it. Alternatively, you can contact Brentwood Asset Advisers or Qualified Annuity Providers and let them handle it - but they will take a nice slice.

Agreed. I think the mistake people make is assuming that target normal cost and funding target have anything to do with reality. Bad consulting will produce bad results and there is a lot of bad consulting out there, especially with the TPAs that use a "signature for hire" actuary. Assuming interest crediting rates are less than funding rates, the funding target is generally lower than the hypothetical cash balance. This produces a Minimum Required Contribution that is typically less than the amount necessary to keep the plan 100% funded based on actual account balances. Also, as the plan matures, the maximum deductible will generally be significantly more than the amount necessary to keep the plan 100% funded. We typically talk to our clients about "recommended" contributions that will keep the plan 100% funded. Getting that recommended number to fit within the minimum and maximum usually isn't a problem, but it certainly could be if rates move dramatically.

2 Cents - not sure what your point is. Obviously defined benefit plans are different than defined contribution plans and therefore they won't work in the same way. If anyone ever told you cash balance plans control costs the same way defined contribution plans do, they were flat out wrong. Also, not sure what you are implying about when IRS will require the new SOA mortality tables. It is definitely coming, most likely for 2017, but it will have no impact on most cash balance plans. It will however push up lump sum values and funding requirements in traditional defined benefit plans.

Zoraster - "cash balance" or "traditional" are simply methods of determining the amount of benefit payable at some event. They have nothing to do with the benefit delivery. Cash balance plans don't have to pay lump sums, and traditional plans can offer forms of payment other than annuities. The big advantage of cash balance plans in the small plan market is the ability to control the cost of the benefit and to allocate the same "value" of benefits to people of different ages/compensation levels.

They are based on the plan's actuarial equivalence factors (limited by 415 regulations), but never to exceed the maximum compensation limit. Therefore, the highest the limit can be in 2015 is $265,000 regardless of the age, which you will probably be hit around age 69. Just like the factors for retirement ages below 62, no one can really tell you what the maximum is, because it is different for every plan.

So, was the prior actuary just determining the value of his current year's accrual and telling him to contribute that. Then he takes it out as a distribution equal to the PVAB? Were you just rounding when you said he puts in 100K, and takes out 100K? I guess IF the plan had an in-service distribution option, and if the PVAB of the current year's accrual fell within the min/max for the plan year, you could contribute the PVAB, then turn around and immediately take it out as a lump sum distribution. I am not a tax pro, but seems to me you are not accomplishing any different than taking it as compensation. Corp gets same deduction whether it pays the pension contribution or payroll, participant takes it right out and pays the income tax...so what have you saved? Except, by doing it this way, the money is never taxed for social security or medicare? Interesting....I guess if your comp was high enough, it might justify the cost of the plan.

More information is needed. How does he justify taking all of the assets out at the end of the year? Is he over NRA? What is the distributable event? Is this a cash balance or a traditional db? Can you give some idea of the benefit formulas. Can you provide more specifics around the entry age, attained age, and retirement age of the participant.

Also, don't forget to consider if any of the terminated vested participants are former HCEs, you cannot pay an unrestricted lump sum unless the plan is 110% funded after the payout.

100% of pay IS the 415 limit and therefore you need to consider the 415 rates to determine the maximum lump sum.

I think what David meant was that your questions are not the type that you can be adequately address on a message board. Although you may not want to, you should ask your questions to the actuaries in your firm who are best qualified to understand the context of your question.

David - I agree, but I believe it must be a "full" distribution. I don't think they can elect to receive just 50% of their monthly annuity. I think Zorro was asking about "partial" distributions.

No Congress has been considering various concepts around phased retirement for years, but so far, nothing of substance has come from their considerations.

ok, I will jump in even though I haven't looked any of this up. In IRS Announcement 2004-58, I.R.B. 2004-29 the IRS gave an automatic pass on the QJSA being most valuable against the lump sum if the lump sum is based on 417(e) rates. If you are not using 417(e) rates, you may have a problem if the lump sum turns out to be more valuable than the QJSA. Under the relative value rules you would compare the value of the lump sum to the value of the immediate QJSA based on 417(e) rates, therefore early retirement reductions can also impact the results. Lets say the AB is 1,000 for life. The partic is 65 and spouse 62. Plan using 6.5% for optional forms and 417e for lump sums. LO = 1000, J&100 = 850, LS = 162,000, value of J&100 on 417(e) - 166,000 LS is 97.6% of QJSA. No problem - QJSA is more valuable. Now, lets say you are using 2% to determine the value of the lump sum. LO = 1000, J&100 = 850, LS = 194,000, value of J&100 on 417(e) - 166,000 LS is 117% of QJSA. Now I think you might have a problem.

Sorry, I don't have anything in writing but I have been at several meetings with high ranking IRS representatives who were very clear on this point. Once the minutes from the meetings are published, I can provide something more concrete. In the meantime, you can assume that by the time your participant is ready to terminate the plan, it should be accepted as common knowledge.

Also, the IRS has been very clear in their comments since the notice was published that they do not intend to change anything that existed before a few PLRs were released that triggered the run to cash out retirees. They have been clear that participants who are receiving an annuity will be able to convert to a lump sum at the time of separation from service or plan termination.

I think you are getting some terminology confused. In your example, he is NOT receiving a "lump sum". He is receiving an annual annuity. A lump sum is a one-time payment equal to the present value of the annuity. Your participant will still be able to receive a lump sum upon termination of employment, or upon plan termination, assuming the plan is properly amended to accomplish it.

Thank you. Very helpful.

If a "Critical and Declining" plan elects to lower accrued benefits, how does that impact a contributing employer's withdrawal liability? Is that run through the calculation like any other "gain"? In other words, are there any special rules that exempt the impact of the reduction from the withdrawal calculation?

Such an amendment would not be possible at all. A lump sum is a protected right and feature of the accrued benefit and cannot be removed. The best you can do is remove the lump sum option for future accruals, but you can't take it away from benefits already earned. Therefore, it would be effective for benefits earned after the effective date of the amendment.

As Lou said, the document holds the answer, but basically they have 3 options: 1) Fund the shortfall 2) Reduce the benefits for a select few owners/hces - what ever they feel is equitable 3) Reduce the benefit for everyone in accordance with plan doc. 1 or 2 are the best options as far as the IRS is concerned, but legally, there is nothing wrong with 3. Also, if it was PBGC covered, they would force the owners to reduce their benefits and make sure any non-owners received full value. Don't kid yourself into thinking the PBGC would have provide any realistic benefit in this situation.

The IRS perceives that elderly people are being taken advantage of in these lump sum buyouts. They are also concerned about changing mortality standards and want to slow down lump sum windows that occur before they can get the new 417(e) tables released. Their main position is they don't agree with the two PLRs that were released that many have been using to justify lump sum windows for retired populations. In their mind the final regulation won't "change" anything that existed before the PLRs. You will still be able to convert retired benefits to lump sums upon death, termination of employement, or in conjunction with a plan termination. You will not be permitted to simply offer your retired population a lump sum buyout.