415 Limit with respect to MASD's

[Blinky the 3-eyed Fish]

Situation: a one-person plan has been overfunded. The person has been receiving a monthly annuity for years and now wishes to take a lump sum. The person's benefit was at 100% of Hi-3 compensation. That Hi-3 has not increased since.

Obviously, the change in the payment structure causes a new annuity starting date. The new 415 regs provide that prior distributions are actuarially adjusted and counted toward the 415 limit. However, the final regs aren't applicable until 1/1/2008 in this case (calendar year limitation year).

So, my question is what is your opinion about ignoring the final regs and going back to the pervasive thinking before they were issued? I know my opinion then was that when a person was at a Hi-3 limit, because that limit didn't increase as the person got older, prior annuity distributions didn't count against the 415 limit.

I found this thread along that line of thinking:

http://benefitslink.com/boards/index.php?s...or+distribution

My thinking is there wasn't really guidance beforehand and these 415 regs, while not effective yet, do provide the IRS' line of thought on the subject. I would be largely inclined to follow the methodology spelled out in the final regs.

[Guest Carol the Writer]

I was in a similar situation a couple of years ago - which obviously was pre-1/1/2008. In my case I gave the individual an ad hoc COLA increase to his monthly pension - which was not at the dollar limitation but was at the high-3 compensation limit. Any opinions about whether this would work either for Blinky or for what I did? Thanks!

Carol Caruthers, MSPA, EA

[flosfur]

COLA can be applied to Hi 3 only if the employee has terminated employment which I don't think is the case in one-person plan. He can terminate employment only by closing the business down and then the plan must also terminate as it will have no sponsor.

[Blinky the 3-eyed Fish]

I am not concerned with any increases to the annuity. That doesn't solve the problem. Now back to my first post...

[David MacLennan]

Blinky, you might be mistaken about what the 415 final regs say. There will be newly proposed MASD regs at some point in the future. The final 415 regs have an interim rule, which at first glance appears to be a stricit actuarial equivalent offset rule. However, it is not - it is really just a good faith standard. Marty Pippins has confirmed this publicly during the 415 ASPPA webcast, and there are other reasons to conclude it is a good faith standard. I have written an article on the interim rule which will be published within the next couple of months. I'll send the draft to you. So, you are fine doing something more reasonable and fair.

"You just have to do something, what you do is up to you."

[ak2ary]

I have to agree with David

The IRS is looking for a good faith standard. I have recently done 415 sessions with both Jim and Marty and they really are looking to a good-faith standard. I would be careful not to read more into the final reg than is there. I don't believe the IRS believes that there is any kind of a procedure in there

[Blinky the 3-eyed Fish]

I am posting this in advance of reading David's draft article and maybe that will clarify things when I do. In the interim though, it seems that the language in 1.415(b)-1(b)(1)(iii), "In determining the annual benefit for such a participant as of a particular annuity starting date, the plan must actuarially adjust the past and future distributions with respect to the benefits that commenced at the other annuity starting dates.", is a clear indicator of the need to consider past distributions in my example.

I appreciate that there is a good-faith reliance here because there is no mention of how the actuarial adjustment is calculated. However, I don't see not adjusting 415 limit by the prior distributions in my example as any sort of good-faith reliance of this language.

Would either of you two argue differently? I am looking for your opinions.

[David MacLennan]

I appreciate that there is a good-faith reliance here because there is no mention of how the actuarial adjustment is calculated. However, I don't see not adjusting 415 limit by the prior distributions in my example as any sort of good-faith reliance of this language.

Would either of you two argue differently? I am looking for your opinions.

I would argue differently! The early retirement factors in the 415 comp limit, equal to 1.0 for any age, creates a de facto actuarial equivalence assumption that must be recognized if you are going to treat all participants equally, as the Code requires in my opinion. Given the 1.0 ERF's, the prior distributions do not create any offset under the correct mathematical solution (BERF=WERF). I guess you could say that you are considering the prior distributions, but that they don't affect the limit. However, if the prior annual distributions are large enough, say some exceeded the 415 comp limit, then it would create an offset.

[ak2ary]

IMHO, good faith compliance does not require an offset to the 415 limit in this case. If you look at David's BERF=WERF approach or ASPPA's approach which is detailed in their MASD comment letter (available on their website), both approaches take into acount the prior distributions and both approaches would provide that the full benefit can be converted to a lump sum without an offset.

Just my opinion FWIW

edit was to correct a spelling error

[Blinky the 3-eyed Fish]

David, I wanted to thank you for sending me the articles. I finally had a chance to read through those and after re-reading the proposed regs and commentary, I finally am seeing the entire picture. It is much more obvious to me that the 415 regs language I quoted is not a straightforward actuarial increase offset.

[flosfur]

..... Given the 1.0 ERF's, the prior distributions do not create any offset under the correct mathematical solution (BERF=WERF). I guess you could say that you are considering the prior distributions, but that they don't affect the limit. However, if the prior annual distributions are large enough, say some exceeded the 415 comp limit, then it would create an offset.

Pardon the ignorance but what is BERF & WERF? I guess ERF would be "early retirment factor"?

I was astounded to hear & read that in converting the 100% Hi 3 limit to a lump sum one must adjust for prior distributions even if the prior distributions were an annuity payments = Hi3 limit. It made no actuarial sense.

If one is entitled to $A per month for life from age x which is not adjusted if the payment is received before or after age x and starts recieving the payment from age x, then at age y (>x) the lump sum value has to be the PV of $A per month at age y and not PV of $A per month at age y minus the total of annuity payments received or accumulated value of such payments received. This goes against any mathematical logic but then again neither the IRS nor the legislature rarely do what is rational or mathematical logical.

[flosfur]

...... I have written an article on the interim rule which will be published within the next couple of months. I'll send the draft to you. So, you are fine doing something more reasonable and fair.

........

Where will it be published?

[Guest merlin]

Where and when? I have a situation similar to Blinky's, and I'm sure there are many others on these boards who are in the same boat.

[David MacLennan]

flosfur: You are right, ERF stands for early retirement factor. BERF=WERF is an (almost) self-evident equation that can be considered "generalized actuarial equivalence". I can email you articles on BERF=WERF if you would like to read them. Send me an email through BenefitsLink.

merlin: The article on the interim MASD rule will be in the Summer 2007 edition of the Journal of Pension Benefits. This is available by subscription and the cost is approx $200 per year (4 issues per year). The publisher has given me permission to send a few people the draft, so I can send a copy to you if you send me an email.