Maximum Lump Sums under Pension Equity Act

[Guest fiddler]

I am somewhat confused as to the calculation of the maximum allowable lump sum under IRC 415 for NRAs prior to age 62. Assuming that the plan's actuarial equivalence post-NRA is 5%, 94 GAR. Is 1 or 2 below the correct method?

1. Convert age 62 415 maximum dollar limit ($165,000) to a lump sum using 5.5% apr, discount back to NRA using 5.5%.

2. Convert age 62 IRC 415 maximum dollar limit to a lump sum using 5.5% apr, discount back to NRA using 5%.

[Guest penman]

Generally:

1. Calculate the maximum benefit (not LS) at NRA. That is the 415 limit reduced from age 62 to NRA taking the lesser amount based on plan actuarial equivalence or 5%/94GAR.

2. Calculate the 415 maximum LS based on an immediate annuity at NRA based taking the lesser amount using 5.5%/94GAR or plan actuarial equivalence.

Note that there is a transition rule for 2004: The sponsor can use the the 30 year rate in effect on the last day of the last plan year beginning before January 1, 2004 rather than the 5.5%. I am not certain if that means, for a calendar year plan, the rate under the terms of the plan at 12/31/03 or the 12/31/03 rate.

[Guest fiddler]

Thanks penman. That is how I originally read the new law but I was getting conflicting opinions from others.

[mwyatt]

Just for clarification, did the new law change the interest rate used in determining the benefit where NRA is greater than 65, or do we still use the 5% max cap for conversion purposes?

[Guest penman]

Only the rate for determining the LS changed, not the rate for determining the benefit, regardless of whether NRA is before 62 or after 65.

[mwyatt]

Thanks Penman.