Restricted Participant under 1.401(a)(4)-5(b)

[Guest meggie]

Tried posting this and was kicked out.

A lot on the message board relates to payment options for restricted participants. My question has to do with determining whether a participant should be restricted.

I have a general understanding of the rules under 1.401(a)(4)-5(B), but the rules do not address when the current liability and plan assets should be valued other than they must be valued as of the same date and they must use reasonable assumptions.

Here is my dilemma: Several "25 high" participants want to retire and take their lump sum. They will be leaving in the same year.

Is each person's expected lump sum distribution tested against the last published liability and asset information (example Schedule b) or does the test have to be done as of the person's expected distribution date, taking into account anyone who left before? If the first approach is used, then it doesn't matter who leaves first in the year since only his liability is being tested vs. plan assets and liability as of the beginning of the year. If the 2nd approach is used, then it implies "first come , first served" which seems ridiculous!

My other related question- it is my understanding that when checking the 110% rule, you subtract the CL for individual from the total CL and subtract his expected lump sum distribution from the plan assets and then see if the net result meets the 110% rule.

Would appreciate any comments!

[MGB]

The following is the only additional information from the IRS on the subject of when to calculate CL. This is from the 1996 EA Meeting Gray Book Q&A 34:

Regulation §1.401(a)(4)-5(B) contains restrictions on payouts to the 25 highest paid employees. There are exceptions if, after a lump sum payment is made, the remaining assets are equal to at least 110% of the current liability or if the lump sum payment made to the participant is less than 1% of the current liability.

Reg 1.401(a)(4)-5(B)(3)(v) indicates "for purposes of this paragraph (B), any reasonable and consistent method may be used for determining the value of current liabilities and the value of plan assets."

a) Are all types of current liability (CL) required under IRC 412 reasonable - for example, old law CL for the 150% full funding limit, RPA CL for the additional funding charge, or gateway test CL? The different mortality and interest could make a significant difference in the results.

b) Should the most recent valuation results be used for the entire year or may current liability and assets be remeasured as of the proposed payout date? Note: by remeasuring, actual benefit payments and contributions could be taken into account.

c) Assuming calculations are as of the payout date, may the interest rate as of the payout date be used, or must the interest applicable for the plan year be used?

RESPONSE

The regulation indicates that any reasonable, consistently applied interpretation is acceptable. Any of the above methods seems reasonable.