Early ret window and lump sum interest rate

[Gary]

Two issues.

1. Plan provides enhanced early out. Enhancement includes an additional 5 yrs for pension accrual and for early ret factor. Plan then pays lump sum based on immediate benefit.

Would one expect the lump sum to be computed based on current age (i.e. actual age) or age plus five years. Plan is not specific on this matter.

2. The lump sum interest rate used is the applicable interest rate as described in 417(e) for the month of December preceding the first day of the Plan year (cal yr) in which the distribution occurs ...

Would one interpret this to mean the 30 year rate for December or the 30 rate published in December, which is thus the November rate? Or something else? The Plan is no more specific than this.

[david rigby]

1. Be careful about how plan defines the lump sum equivalent. Some, but not all, use a deferred annuity calculation. Some plans are silent on this point, thus leading to "what is the precedent?"

This may not be relevant directly to your question. If the plan amendment adopting the window has not yet been executed, then there is still some flexibility in how it is defined. If the plan is ambiguous, or if the plan uses the immediate age and the plan sponsor wants to limit the cost of the window, then solely for the window, it can be defined in another manner.

2. I would anticipate that your language means the rate for December, which is not available until the end of that month. (Makes it pretty hard to anticipate the true cost. Also very difficult to make the payment on January 2, when everyone wants it.)

[Gary]

Thanks pax.

1) The window benefit was paid in 1998. And it was computed based on a immediate annuity. So the question is, does it seem reasonable to base it on the actual age or the age in five years, in your opinion?

2) I agree w/r/t your comment about difficulty in making a Jan 2 payment. And the Plan may have intended to use the Nov pmt, but I was just curious as to how you would interpret what is actually in the Plan.

[david rigby]

1. The age used is most likely governed by the plan and its prior administrative practices. Unless specifically stated otherwise in the plan amendment, I would use the same provisions/practices as used before. It is worth noting that the plan amendment could alter this only for the window, but it should be in writing.

2. I think the language you (and the rest of us) see is from the IRS, and is a carryover from the pre-GATT language. Recall that the most common (OK, one of the most common) phrasing pre-GATT was to refer to the PBGC rates in effect at the beginning of the plan year (or "for the first month of the plan year", etc). In that case, it made more sense because PBGC rates were announced in advance. GATT rates are not known in advance, so to accomplish the same thing, you have to use a lookback period. If you use November as your lookback month, it only gives you about a month's advance information. Using October (or sooner) is possible, but it caused problems with safe harbor definitions.