415 limits

[FAPInJax]

I am unable to find any cite regarding the calculation of the 415 immediate annuity value at attained age under the following scenario.

Plan has AE which has different pre and post retirement interest rates. No early retirement.

Assuming a normal retirement age of 65 and a participant 55. The maximum lump sum payable is based on 5.5% interest and GAR 94. However, what is the benefit at 55? Is it ratioed down from 62 to 55 using pre or post interest rates?

Thanks for any and all responses.

[Mike Preston]

The general consensus is that you use the pre-, I believe.

[rcline46]

I also believe it is the pre- rate, but not below 5%.

[Andy the Actuary]

I'm out of town and don't have the reg in front of me (i.e., I'm copping out), but wouldn't the maximum benefit be the lesser of the benefits determined using (a) the plan rates (pre and post) or (b) 5%?

[ak2ary]

You use whatever rate the plan says to use to determine the benefit. If the plan is silent, I would use the pre-retirement rate for the pre-NRA discount period.

You would use the lesser result of

the plan's rates or

the applicable mortality table with 5%

[flosfur]

.............. The maximum lump sum payable is based on 5.5% interest and GAR 94. However, what is the benefit at 55? Is it ratioed down from 62 to 55 using pre or post interest rates?

....

The revised S415 regs (and the guidance prior to them) approach this calculation from the lump sum paid (payable) & work backward to the equivalent annual benefits.

As I read the regs (and I will soon find out here if I am wrong), for benefits subject to S417(e)(3), the following steps are involved:

Step 1: Compute the lump sum under the plan, which is the greater of the lump sum equivalent of the accrued benefit using the plan and the S417(e)(3) assumptions at the current age (x).

Step 2: From the lump sum computed in step one, determine the equivalent annual benefit at age x using:

(a) plan assumptions, (b) S415 assumptions (5.5% and applicable mortality) and © S417(e)(3) assumptions & divide the S417 benefit by 1.05.

Take the greatest of the 3 equivalent annual benefits - this is the testing benefit.

Step 3: Determine the S415 annual benefit at age x using the S415 assumptions (5% & applicable mortality).

The annual benefit computed in Step 2 must be <= to the annual benefit computed in Step 3. If not, then the lump sum computed in Step 1 must be reduced to the extent required to bring the benefit in Step 2 down to the benefit in Step 3.

[Andy the Actuary]

In Flosfur's step 1, isn't the accrued benefit the formula benefit as limited by Sec 415?

So, for example, if a Plan provided a straight life annuity at a Normal Retirement Age of 55 and the Participant had six years of participation and the Plan actuarial equivalence was 94GAR, 5%, then wouldn't the accrued benefit be limited to:

180,000 x [a62 / 1.05^7 / a55] x 6/10

Assumming this exceeded the formula accrued benefit, then this is would be the benefit used to determine the lump sum.

Any comments?