Present value of 415 benefit

[Guest HaroldA]

I have an end of year one participant plan. The benefit is 100% of high 3-year average compensation. The participant is 68 years old and has 10+ years of plan participation as of 12/31/2004. His high 3-year average compensation is $205,000.

Two questions:

1) How do I calculate his age adjusted 415 $ limit at 12/31/2004?

2) What is the present value of the age adjusted 415 $ limit at 12/31/2004?

I'm sure I will need to provide more information, so just tell me what you need.

[Guest penman]

The post 65 adjusted 415(b) limit is the benefit adjusted to age 68 as follows based on which set of assumptions produces the lower benefit between the plan actuarial equivalence rate and mortality or 5% with 1994GAR mortality:

Age65 415(b) Ben * (1+i)^3 * APR65/APR68 = Age68 415(b) Ben

The 415 Lump Sum, for distributions after 12/31/04 is the smaller lump sum value based on the the plan actuarial equivalence rate and mortality or 5.5% with 1994GAR mortality.

[Guest BDZ]

Dear Penman,

We have done a similar calculation to justify a distribution for a participant who was beyond his normal retirement age and whose benefit was limited by 415(b)(1)(B). This plan is currently being audited by the IRS and the agent is contesting the calculation. Do you have any authority reference (other than common sense) for this calculation method? Thank you very much!

BDZ

[Guest penman]

BDZ, see 415(b)(2) in general and 415(b)(2)(E) regarding the assumptions.

Note that my explanation above is put in terms of smaller and larger benefit and lump sum amounts and the IRC guidelines are phrased in terms of greater or lesser interest rate assumptions, the results are the same. The Pension Funding Equity Act changed (E)(ii) to 5.5% rate (from 5%) for 2004 and 2005. Also, if the lump sum was made in 2004, there is a grandfathering provision available under the PFEA.

[Blinky the 3-eyed Fish]

BDZ, keep in mind that penman's response to the first post was regarding the dollar limit of 415(b)(1)(A), which is increased after age 65. Your are asking about the Hi-3 limit under 415(b)(1)(B), which is not adjusted for age in any way. If you post details of the calculation, someone may give you some insight.

[Guest penman]

Good point. I fixated on "similar calc".

[Guest BDZ]

Thank you very much for the replies. In my haste and desire to back up a position that may be incorrect, I read the original post and response and interpreted it as a 415(b)(1)(B) computation. Our individual attained Normal Retirement Age of 63 and the plan was not liquidated until he turned 65. The plan allowed for in-service distributions at NRA and has the single sum distribution option. It also contains the deferred retirement actuarial increases rather than the suspension of benefits. The ultimate single sum distribution was calculated based on the benefit at 63 with actuarial equivalent increases for deferred retirement. While Revenue Ruling 2001-51 Q&A 4 seems to be on point with respect to not increasing the monthly benefit prior to age 65, we hope to justify the single sum equivalent option with respect to the age 63 benefit. If anyone has any suggestions, they would be greatly appreciated.

[Blinky the 3-eyed Fish]

You could post the details needed for someone here to recreate the maximum possible amount, but you certainly can't justify paying out a maximum lump sum for a person at a Hi-3 limit at age 63 when he is actually age 65. It's an inherent fact that the lump sum for a person at a Hi-3 limit is decreasing once they hit 10 years of service.