Maximum Distribution

[Blinky the 3-eyed Fish]

A 60 year-old participant in a DB plan has been receiving annuity payments for the last 10 years after taking early retirement. The question is how to determine the maximum distributable benefit under the laws of the land under 2 different scenarios.

1 - The limiting factor is the dollar limit

2 - The limiting factor is the compensation limit

Specifically, are the past annuity payments subtracted in determining the figure?

[MGB]

Why are you doing any recalculation???? That, in itself, is not allowed.

I.e., he can't get any more than the prior year's payment (assuming it was calculated correctly) plus the CPI change, and then only if the CPI change doesn't produce a benefit larger than what the plan provided.

[Blinky the 3-eyed Fish]

MGB and David, this is actually a takeover of a one-man plan. The sole owner "retired" and began receiving annuity payments on the plan's early retirement age while keeping the corporation active as a shell. The assets in the plan have been too great to pay out under the 415 limits, but with the EGTRRA increases, it may be possible now to distribute without a reversion. I am now attempting to calculate the maximum distributable lump sum, hence my original question.

David, your methodology is what I was thinking as well, being that the dollar limit increases with age, while the value of the comp limit decreases with age. You wouldn't happen to know of any written guidance though?

[Guest dsyrett]

Using this logic, would the following be correct?:

I have a gentleman who received a lump sum distribution from his 1 man terminated DB plan in 1996 at age 65 based on the then dollar limit of $120,000 x 7 YOP / 10 or $84,000.

He now is 73 and wants to install a new DB plan to take advantage of EGTRRA.

His hi 3 is $188,000.

Based on an NRA of 77, I get

age 77 value of $84,000 at 65 using old DB plan ac eq IA83M 6% = $245,642.

age 77 value of $160,000 age 65 limit RR 2001-62 and 5% = $428,167.

Maximum benefit at 77 thus min (188,000, 428,167 - $245,642) = $182,525.

[flosfur]

The method looks OK to me.

[Blinky the 3-eyed Fish]

I don't think I agree. In the example I began with, the person was in pay status receiving annuity payments. In this example, the person received a prior lump sum distribution. Yes, both are prior distributions, but while I think you would not subtract out the prior annuity payments, I do think you need to subtract out the value of the prior lump sum payments.

If you didn't subtract out prior lump sums then it would be conceivable for, say a sole proprietor with a low compensation history, to set up a DB plan and continually withdraw money without counting against his 415 limit. That certainly wouldn't be kosher.

[Guest dsyrett]

OK. But is it an all or nothing result (no subtraction if in pay, full subtraction if lump sum)? Seems like I should get partial credit, eg., subtract pres val of "future payment" portion of lump??

[Blinky the 3-eyed Fish]

I agree that a reasonable approach that takes into account that the Hi-3 limit is decreasing in value can be taken. Personally, I would consider converting the prior lump sum to an annuity at the point of distribution and then subtract out the annuity amount. In your example then, the 84,000 would be subtracted, leaving the 415 limit at 104,000. Of course without specific guidance it's all a crap shoot.