Can minimum Lump Sum under 417(e) include Pre Retirement Mortality

[Guest Scott McHenry]

Can the minimum lump sum as calculated under 417(e) include pre retirement mortality?

For Example...

Assume Plan's AE is

7% Pre

7% Post

GATT Pre mortality

GATT Post mortality

And...

NRA is 65

Current Age is 50

1,000 a month benefit at NRA

5.32% applicable interest rate

Which of the following is the correct lump sum?

1000 * 134.83 GATT APR@65 * (1.0532)^(-15) = 61,964

or

1000 * 134.83 GATT APR@65 * 0.4223501 D65/D50 = 56,945

[david rigby]

Oooh. My turn! The famous actuarial response: What do you want the answer to be?

The lump sum can be any definition under the plan as long as a few conditions are met:

- nondiscriminatory in definition and application,

- unisex,

- cannot be less than the minimum under 417 (GATT mortality for pre and post, and the appropriate 30-year treasury rate)

Did I leave anything out?

[MGB]

Although not part of the original question, if you extend this to a large distribution that is subject to 415, then an additional issue comes into play.

In computing the lump sum of the 415 limit, you must ignore pre-retirement mortality if the plan provides for no forfeiture upon death. I.e., if the death benefit is the PV of the accrued benefit, then you must ignore mortality in determining the lump sum.

But, that is only if 415 comes into play.

The real answer to the original question is "what does the document say?"

[Guest Scott McHenry]

Thanks for the responses.

[MGB]

In my earlier post, I said the 415 rule incorrectly when there is a PVAB death benefit.

For pre-retirement mortality, you have the option of ignoring or not ignoring it (not ignoring it gives a lower lump sum, so the IRS doesn't care that you go in this direction).

For post-NRA adjustments, you must ignore mortality under this situation. (I incorrectly said this for the pre-retirement side.)

[Gary]

I like to look at it as

1000* (N65/D50) (when pre-ret mortality)

[david rigby]

I decided to re-read this thread. I think the answer to the original question is Yes. But MGB is absolutely correct: what does the plan say?

[Guest gipkel]

I believe this issue is currently being litigated.

[AndyH]

Good.

I have never understood why a plan should be allowed to apply a full pre-retirement mortality discount to a "minimum" lump sum when there is no forfeiture upon death.

Maybe I'm just dense, but how is it "actuarially equivalent" when at least a REA death benefit is required? And how is it justified when there is no forfeiture at all upon death?