COLA & Lump Sum Calculation

[alexa]

I have a DB plan we are planning on terminating and amending to allow for a lump sum payment option.

Plan has a COLA feature on retirement annuity which is eventually capped after so many years.

Does one need to factor in the COLA adjustment in valuing the lump sum? Or can one just take the present value of the monthyl accrued benefit at NRA?

Thanks

Alexa

[Guest Steve C]

The COLA feature is protected by section 411, so must be included in the lump sum value. Doing otherwise would result in an impermissible forfeiture of accrued benefit (...I'm stealing language from Q-39 of the 1994 Graybook...).

- Steve

[david rigby]

...if the plan is subject to IRC 411.

[AndyH]

Is the answer the same with a subsidized QJSA (as normal form)?

[Guest Carol the Writer]

The only cautionary note that I would add is the Code Section 415 dollar limitations.

[Guest Steve C]

Are we still talking about COLA, or are you asking whether the J&S subsidy must be reflected in the lump sum?

If you're asking about the J&S, I think the answer depends on how the plan is written. Preferably the J&S subsidy is not truly part of the normal form, in which case the subsidy can be ignored when determining a lump sum or other optional forms (being reflected only in the QJSA).

[AndyH]

Just curious. I saw one a few years ago that covered only a couple of people and it provided an unreduced J&100 for married participant, life annuity for unmarried. And a lump sum was an option.

I agree with you-it probably does depend upon the wording which I don't recall exactly. The actuary overseeing the case did specify that the J&S would be reflected in the lump sums, married or not, but I always wondered whether or not there was something that required this or whether it was merely an interpretation of the document.

[Guest Steve C]

I've always had an issue with a J&S normal form. Should married participants receive more valuable benefit options than singles? What if a higher percentage of HCEs are married than NHCEs?

These issues are sidestepped by replacing the J&S normal form with a life annuity normal form combined with a subsidized QJSA. That delivers the benefit form that was being sought, but without an impact on optional forms.

[david rigby]

If you look closely, you may find that most plans covering a "couple of people" will have a husband and wife. Likely, the point of defining the normal form as a J&S is to create an "impact on optional forms," especially the lump sum. But I'm jsut guessing.