Normal form question

[FAPInJax]

A client has called and said they want to establish a plan with a normal form of J&100. The benefit formula is flat at $1,000/ month.

They wish to provide that if any participant terminates (married or not) that their lump sum is calculated as $1,000 times a life annuity and then discounted to attained age.

This seems to be minimizing the lump sum but it sure smells funny?? Is there anything wrong legally with this??

I would think that the single participant in this case 'must' get an actuarial equivalent increase (let's say $1,200). Then the lump sums would be equal in value.

A similar issue arises where a plan specifies that the benefit is paid as a 10C&L if single but J&100 if married. Doesn't this create a problem because lump sums are totally different based on marital status??

Is this the same situation??

Most of the cases I have seen have the life annuity as the normal form and all other settlement options are actuarial equivalent.

Thanks for any and all responses.

[Guest Carol the Writer]

As I have said in my previous postings, my experience is old. However, I thought the 415 limitations and the regulations called for lump sums to be computed as the actuarial equivalent of the life annuity, and that the only permissible use of unreduced J & X% SS was for the subsidized annuity form of payment.

I am willing to be corrected, however.

[Blinky the 3-eyed Fish]

Carol, I doubt the $1,000/mo. benefit is near the 415 limit.

Frank, yes, a lump sum payout can be based on the actuarially equivalent value of a SLA even when the normal form is J&100%S. However, for 417(e) purposes, the lump sum must be based on the higher form, or the J&100%S in this case.

As for the fact that lump sums can be different based on marital status, that certainly can be the case when the normal form is the J&100%S annuity. Just look at the QJSA itself. A married person gets an annuity based on 2 lifetimes, while generally an unmarried person is relegated to the SLA. The lump sum disparity is no different conceptually. Now I have never seen an unmarried person's benefit be a 10yr C&L with a married the J&100%S, so I can't say for certain this is or is not acceptable. However, the fact that differing lump sum values occur based on marital status is not an argument against it.

[david rigby]

Many years ago, I had a client plan with normal form defined as 50%J&S if you are married, or 5CC if you are not, with no adjustment of any kind. If that definition is still valid, something like it might provide an alternative for your use.

[Guest Steve C]

Frank,

You should be able to meet your client's objectives by (1) defining the normal form as a straight life annuity, and (2) providing a fully subsidized QJSA (meaning that the participant's monthly benefit under the QJSA matches what he would have received under straight life).

With this arrangement, all optional forms (save QJSA) are equal in value to the life annuity, you avoid disparate treatment of married and single participants and you satisfy the requirement that the QJSA be the most valuable form.

- Steve

[Blinky the 3-eyed Fish]

I had posted something else but after reading through the regs again I agree with Steve.