Top-25 restricted distributions - how much per year?

[Guest guppy]

I've already dug through some of the old threads on this and haven't found anything related to this specific question:

Let's assume I have a restricted employee that will take the maximum amount (life annuity) from the plan until a lump sum can be paid (plan reaches 110%).

Plan year is calendar year. He retires in November, 2003. Monthly annuity is $10,000. For 2003, can he get $120,000 or is he limited to $20,000.

An Code reference would be most helpful as well.

Thanks for any help.

[Blinky the 3-eyed Fish]

WARNING! This post is based on my interpretations of logic and is without practical experience. WARNING!

That being said, I would argue that the figure depends on how the annuity is paid. I feel that the $120,000 is acceptable if taking the annuity in one annual payment each year.

1.401(a)(4)-5(b)(3)(i)(A) describes the amount to be "A straight life annuity that is the actuarial equivalent of the accrued benefit and other benefits to which the restricted employee is entitled under the plan.."

Rev. Rul. 92-76 also discusses the issue, but neither this nor the cite above are specific to your question, so perhaps someone with experience on this matter can add comments.

[Guest guppy]

If that's the case wouldn't the plan have to allow for this form of payment. What if the plan only provides for monthly annuity payments? Although I agree that as a practical matter the payment might be made once a year, I worry that allowing more than $20,000 in year one might create a new form of benefit under the plan.

I actually want to get to Blinky's answer if I can.

[MGB]

Blinky's description is correct, and has been discussed by Holland at professional meetings in exactly this context.

A once-per-year annuity is allowable.

The plan would have to allow for it. However, it may be that your "high-25" language already does. It would need to be looked at very carefully.

I do not think it would need to be an alternative form of payment that is electable. For example, assume the normal form is 10yrs certain and life and that there is no optional form of a straight life annuity. In this case, the plan would still have to pay the restricted amount in a straight life annuity form. And, that is not one of the forms available to a regular retiree. In this case, the language of the "high-25" restriction would suffice to produce the straight life annuity payments.

It is within that language that you need to pick through. Does it describe a "monthly" annuity or point to the straight life annuity (presumably monthly) that is a regular option? Or, does it just have general language (taken from regulations) restricting to a straight life annuity? In the second case, I think you can pay yearly through an administrative interpretive decision.

[Effen]

I think I have read all of the threads from the last few years on the subject of restricted employees and found them very helpful. Thank you all.

Does anyone have a problem with either of these two benefit options:

1) A monthly life annuity (or 10CC or J&100) until such time as the plan's funding ratio increased to over 110% at which time a lump sum would be paid. (forget about how to calculate it for now.)

2) premium refund annuity which guarantees the sum of the payments will at least equal the value of the lump sum.

I have seen these discussed, but I didn't really see any resolution. Is anyone using anything like this? If so, how do you handle the death of the participant (or spouse) under Option 1?

[AndyH]

Effen,

FWIW, my company decided, after much debate, to use 1 as a rule. Much consideration was given to adding something like 2 through plan amendment, but not done. And if the person dies, he/she is subject to the death benefit governed by the election. But the election forms would also provide the right to the lump sum, of course, conditioned upon the bond or escrow being satisfied.

But I don't disagree with Blinky's and MGB's approaches being valid alternatives.