415 limit

[Effen]

Lets say on 1/1/06 an active participant over age 65 received a lump sum based on an accrued benefit of $7,600/mo. life only. The lump sum was paid, based on the 417(e) rates in effect. The amount was $912,000.

The participants 100% comp limit was $8,000/mo. and using 5.5% also produced a lump sum of $912,000. Therefore, even under the post PPA 06 method, the lump sum was permitted.

It is now a year later and the participant has "accrued" an additional $300 under the terms of the plan.

Question 1 - is it possible to pay this $300 as an annuity w/out violating the 415 limit or because the participant received a lump sum equal to 100% of comp, no additional accruals are permitted?

Question 2 - If 3 years from now the participant increases their compensation limit to $18,000, how should I value the previous lump sum that was paid? Would I roll it up using plan factors, 417(e), 5.5%, none?

[David MacLennan]

1) You should be able to in my opinion, but I think the IRS position is that you cannot.

2) This is not just a question of what interest rate. Since it is an MASD issue, you have the question of methodology. The adjustment of the comp limit will certainly be different from the dollar limit adjustment or the plan benefit adjustment. Hopefully you wont be bumping the 415 limit, but if you are you don't have any clear method to follow at this point. There is the flawed method in the proposed regs, the flawed percentage used method, and what I believe is the mathematically correct method. All yield adjustments that can be quite different from each other. So, I would explain to your client there is no guidance on how to handle this if it materializes. Perhaps put something specific in the document and try to get a FDL. Or, wait and see what happens with the final 415 regs, but the MASD rules may not be finalized anytime soon.