Calculating the maximum lump sum

[Guest smhjr]

There is a disagreement in our office regarding the calculation of a participant's maximum lump sum.

With the increase in benefits up to a maximum of 13,750 a month what is the new maximum maximum lump sum? Obviously it depends on compensation, motality, and attained age and retirement age (monthly benefit provided) as well as the current 30 year Treasury bill interest rate.

Does anyone have a formula? Our software that we are using doesn't seem to be correct.

[Mike Preston]

This is too open ended a question to get a productive answer. Many software programs are available that will provide this calculation.

[Blinky the 3-eyed Fish]

I have some questions:

How did you do the calculation when the limit was $160,000?

Is the motality rate the chance of dying in a motel?

Ok, I will try and be a bit helpful. Here is a discussion on maximum lump sum calculations.

http://benefitslink.com/boards/index.php?s...993&hl=lump+sum

If this doesn't help, try fisticuffs.

[Guest smhjr]

Sorry I was trying to be vague becuase I actually think that our software is calculating the number fine. Someone in my office is arguing about it.

I should have done a board search first, I didn't think about it. Thanks Blinky.

[WDIK]

Sounds like someone got up on the wrong side of the creek bed this morning.

[AndyH]

I'll add that there is also disagreement here about how to calculate the maximum lump sum!

[Mike Preston]

There is?

[Blinky the 3-eyed Fish]

Andy, I would classify it as a methodology I hadn't considered, not a disagreement. Truly, it's been about 4 years since I had a maximum lump sum calculation affect anyone, but with the rebounding stock market, I plan on some client investing in the next Dell. At that time I will incorporate Mike's calculation.

[could be me maybe not]

Ok, then, for the panel, how does one determine the current 415 limit at, say, age 65 for someone who previously had a db plan of the same employer and previously received a lump som of, say, $700,000 in 1987 or so?

In other words, the person (business owner) is in plan 2 and was already maxed out in plan 1 years ago. And this is not hypothetical. It is a real situation. Comp at 417 limit, 10 + yos and yop. Prior NRA was 55. Current plan NRA is 65.

Somewhere I read to simply increase the prior lump sum at the current 417(e) rate to current age and convert that to a current annuity. Correct? I cannot find where I read that. Mike, I could be totally wrong but my memory thinks that there is a 20% chance that you were the source of this approach. Wrong?

[Mike Preston]

Very possibly. That was the approach that Jim Holland was espousing in the summer of 2002. I think he has re-thought his position and the answer is much less clear today. It certainly is a reasonable way of doing it, though.

In the absence of guidance, which there really isn't any at the moment, there are two reasonable ways of doing it. Accumulate the prior distribution at the current "controlling" interest rate and offset that amount from the current lump sum limitation; or determine the accrued benefit paid out and offset the actuarial equivalent of that accrued benefit from the current lump sum limitation.

I have previously stated that the old law/new law conversions in 98-1 and 99-44 can be used for this purpose and I still feel that is a reasonable approach. However, the IRS believes that the prior guidance was specific to GATT/415(e) elimination and may not be applicable in all other cases.

In the context of determining the lump sum maximum when a prior distribution has taken place I am in Andy's camp: there is no one way to do things.