415 Calculations

[Guest Turtle_01]

I have a calendar year plan with one participant where Normal Retirement is age 68.5.

As of 1/1/2005, he has more than 10-years of plan participation and is age 67. His high 3-year compensation average is $200,000.

Plan assumptions are:

Mortality: 83GAM Post-retirement only

Interest: 5% (pre and post interest)

I am preparing the 1/1/2005 valuation and I have the following questions:

1) Do I use $170,000 as the 415 dollar limit (which will need to be adjusted for payment past age 65)?

2) To calculate his accrued benefit at 1/1/2005, do I compare the accrued benefit calculated without limit using the plan's benefit formula to the 415 dollar maximum adjusted to 1/1/2005? Or do I compare it to the 415 dollar maximum adjusted to age 68.5?

Thanks!

[Blinky the 3-eyed Fish]

1. Yes, assuming your EGTRRA amendment has the increased limits

2. You compare the plan's benefit to the 415 limit at the assumed age of retirement. So when are you assuming this person will retire? Of course, how is his NRA 68.5 with 10 years of participation? Is it a different age for vesting than it is for benefits?

Where's the actuary on the plan?

[Guest Turtle_01]

Sorry, I should have provided more information in my original post.

This guy had a prior DB plan (covering only himself) from which he received a $900,000 distribution (for 28-years of service) in December of 2000. The plan that I am working on is effective 1/1/2002 (so obviously he does not have 10-years of participation service). Normal retirement is age 65 with 5-years of plan participation (hence the 1/1/2007 NRD). We expect him to retire on 1/1/2007 at age 68.5.

I'm trying to calculate his accrued benefit at 1/1/2005 and I'm not exactly sure how to do that. I'm assuming that I have to calculate a 415 limit for him which will have to be reduced by the actuarial equivalent of his $900,000 lump sum benefit. What is his 415 dollar limit at 1/1/2005? Is it the same as his 415 dollar limit at 1/1/2007 since we are assuming that he will retire at 1/1/2007?

[Blinky the 3-eyed Fish]

What is his 415 dollar limit at 1/1/2005?

You don't care since you are valuing his retirement at 1/1/2007.

Is it the same as his 415 dollar limit at 1/1/2007 since we are assuming that he will retire at 1/1/2007?

No, the dollar limit is increased past age 65, which he is 1/1/2007.

As for calculating his accrued benefit you are valuing a benefit payable at 1/1/2007. Calculate what the plan provides. Now you need to see if his AB is over the 415 limit, so you convert the $900,000 benefit paid (I assume this was from a plan sponsored by a company that is related to the one sponsoring this plan) to a benefit at 1/1/2007. How you do this is of much debate. Personally, I like to use the current plan's actuarial equivalents for what I consider to be an apples to apples comparison; however, I caution that others do it differently. Now you take that figure and subtract it from the 415 limit you calculated at 1/1/2007. Compare the result to the plan benefits to see if the AB is over the 415 limit.

A quick numerical example with made up numbers:

annual plan benefit: 50,000

prior distribution benefit: 140,000

415 limit: 206,000

206,000 - 140,000 = 66,000 > 50,000, so the plan benefit is currently under the 415 limit

[Guest Turtle_01]

That was exactly what I was looking for. Thanks for your help!

[AndyH]

Similar question-opinions please.

And Blinky's comment below is quite pertinent also:

How you do this is of much debate. Personally, I like to use the current plan's actuarial equivalents for what I consider to be an apples to apples comparison; however, I caution that others do it differently.

Lump sum paid out 15 years ago. New plan established 10 years ago. Question: How to calculate new 415 limit considering both old plan and new PFEA 415 limits in 2005.

Assume employee in question hits 65 in 2005. What we had been doing, based upon an interpretation that I believe came from Mike Preston several years ago, which he reconfirmed for me about 2 years ago as being as valid as any, was to take the prior distribution (lump sum) and bring it forward at the current 417(e) interest rate, converting that to an annuity. The plan's rate is 6% or 417(e) of course.

But now the applicable interest rate for 417(e) for 2005 would be 4.89% (with a 2 month lookback). Using this procedure, would we roll forward the prior distribution at 4.89%, 5%, or 5.5%?

Or do others think another procedure is necessary? Thanks for any opinions.

[Guest penman]

The plan that I am working on is effective 1/1/2002 (so obviously he does not have 10-years of participation service).

For the 415 dollar limit under the new plan, in this situation, you can add the years of participation from the old DB plan (since the plans are from the same sponsor, controlled group, etc.).

[Blinky the 3-eyed Fish]

As of 1/1/2005, he has more than 10-years of plan participation and is age 67.

The turtle is aware.

Andy, go with your heart.

[AndyH]

Any other informed opinions or interpretations or comments out there?

[Mike Preston]

With respect to the original poster's calculation, the 415 at 68.5, based on 5%, 94GAR, is 18568.69. The lump sum PFEA max, based on 94GAR/5.5% is then 18417.71 * 124.00110 = 2283816.

I think when the 417(e) rate drops below the plan rate, you are stuck with the plan rate when bringing forward a prior distribution. Certainly when trying to determine the benefit payable under the plan, anyway. That would be $900,000 * 1.06 ^ 6 = 1276667, resulting in a dimunition of the plan benefit payable of 1276667 / 114.61168 = 11139.07.

So, the plan benefit must be reduced by 11139.07. Let's assume that the plan benefit is still very, very high, such that the only concern is the 415 limit.

There is a decision to be made: in the valuation are we assuming a lump sum distribution or an annuity payout? That is a critical determination.

Let's assume lump sum.

The maximum lump sum then would be the maximum lump sum of 2283816 reduced by some reasonable interpretation of what the lump sum offset should be based on the prior $900000 distribution. Prior to the new proposed regs coming out, I would have argued for consistency (rather than "the worst of all worlds", which is what the proposed regs seem to do) and therefore would have reduced the PFEA lump sum of 2302538 by $900,000 * 1.055 ^ 6 = 1240959, resulting in a lump sum to fund for of 1042857.

Notice that I don't explicitly calculate the annuity benefit payable. That means i back into that number, depending on what the computer is using for an APR. To be consistent, I would probably argue for using 94GAR/5.5% and therefore argue for an annuity at age 68.5 of $8410.

The max accrued benefit at 1/1/05 is relevant to the Current Liability determination. At 1/1/05 the participant is 66.5, with a 415$ limit of 15838.28 and an offset for previously distributed amounts of $900,000 * 1.06 ^ 4 / 122.38076 = 9284.38. The actuarial equivalent of this amount at age 68.5 is the accrued benefit to be used in the valuation for determination of current liability. Again, assuming that the actual plan benefit is so high as to not invoke anything other than pure 415 limits.

However, I have always had a bit of difficulty with current liability that exceeds projected liability. Such is the nature of our conflicting sets of assumptions. I think I've reconciled myself to this type of anomaly.

There are certainly other reasonable ways to determine current liability, such as a pro-rata approach, or an approach that limits it to no more than the projected benefit valued at current liability assumptions.

I'll make a separate post for Andy's hypothetical.

[Mike Preston]

Andy, in your case, I think the prior distribution should be brought forward, at a minimum, at the plan interest rate. At least for purposes of determining the plan benefit that is payable.

I could see an argument for bringing forward the prior distribution at current 417e rates to determine the 417e benefit payable, but I understand that two separate rates being used in this way can lead to strange results.

Until the 415 regs are effective, I think the best course of action is to do something reasonable.

Following the draconian proposed regulations would not, in my opinion, necessarily be reasonable unless a discussion with the plan sponsor and potentially the plan sponsor's attorney takes place.

[AndyH]

Thank you very much Mike.

Unfortunately, the plan has "matured" so it is in it's last year and the termination deficit should be contributed and deducted in 05 and/or 06. But we aren't sure what to tell the client to contribute because it will depend upon the 415 calculation. And, as you alluded to in your other post, there is also current liability to consider, specifically the unfunded cl deduction limit.

I'll need to digest your figures on Turtle's post a bit but that and your comments including the last sentence here are very helpful.