Ensuring maximum lump sums for 2004 and 2005 due to PFEA

[Gary]

My understanding is that if a plan uses the 30-year treasury for lump sums, then with no amendment to the plan it is possible that a participant can get a lump sum less than the 415 limit if the lump sum were based on a life annuity equal to the maximum life annuity for plan years beginning in 2004 or 2005. This would occur if the 30-year rate went above 5.5%.

My feeling, to avoid this potential scenario, amend the plan to base lump sums on the lesser of 5.5% or the 30-year rate for 2004 and 2005, then if the participant receives a lump sum based on the maximum life annuity under 415 he will receive the 415 lump sum limit.

Any observations?

Thanks.

Gary.

[Guest penman]

The transition rule expires 12/31/04 regardless of the plan year. After that, if you're trying to maximize lump sums for everyone including those not at the 415 limit, your definition would do that. If you want to maximize lump sums for only those participants at the 415 limit, why not just make the AE definition 5.5% and 94GAR. Without going back to look, I don't believe I could fit your "lesser of" AE example into either the prototype or volume submitter documents I use.

[Blinky the 3-eyed Fish]

After that, if you're trying to maximize lump sums for everyone including those not at the 415 limit, your definition would do that.

No, a near 0% AE definition would maximize LS payouts for those not at the 415 limit, although what employer wants to do that?

Gary, I hope you are thinking of amending as the situation warrants. This is a temporary law, which may or may not become permanent. As penman said, 5.5% and 94GAR AE will get you the max 415.

[Guest penman]

I agree, forgetting the 30-yr rate and just using an AE rate of something below 5.5 but reasonable would be a way to get all participants maxed out. I cannot remember seeing a document that used an AE rate lower than 5% though.