415 Limit Annual Benefit Present Value

[JAY21]

This may seem to be splitting hairs but it does have some value. Plan Doc provides for benefits payable monthly so annuity factors reflect the monthly mortality adj. approximation (the m-1 / 2m adj.). The 415 limits are payable annually, presumably on the 1st day of the year, so technically I don't believe you need to apply a monthly mortality adj.

Is it ok then to use an beginning-of-the-year annual annuity factor for the 415 limit limit present value but apply the monthly mortality approx. adj. for the plan's present value of accrued benefit ?

Years ago I did this on a plan term submission and the IRS inquired about the difference in annuity factors for these different purposes but ultimately accepted it. I realize that's the approach to go again (submission) but am curious as to what most practioners are doing out there and what you feel is reasonable.

[tymesup]

I think the new 415 regs put the kibosh on increasing the 415 limit to recognise that a monthly annuity is less valuable than a beginning of year annuity. For example, if the limit is 180K for 2007, it's 180K no matter how you pay it.

IIRC, ASC is retooling their software to reflect this change.

[JAY21]

Thanks for the input. So if the values are to be the same then I guess it begs the question whether you use the monthly adj. factor or the annual factor for both. If the answer is follows the terms of the plan doc (i.e., whether the plan's benefits are described as monthly vs. annual benefits) then I'm going to change future docs to annual benefits.

[FAPInJax]

The method I have always heard of was to calculate the lump sum as 180000 times an annual annuity factor. This by default provides a larger lump sum than 15000 a month times the monthly annuity factor. I do not believe the new 415 regulations would prohibit such a payment (at least in my memory of the new regulations)

[Mike Preston]

Ambiguous. "such a payment" means which one?

[Andy the Actuary]

If you use an annual factor to determine the 415 limit, just to be safe you may wish to ensure your plan provides for an election of annual payments.

[Effen]

Andy, are you thinking that the new 415 Regs permit you to use an annual factor to determine the maximum lump sum if the normal form is an annual annuity or would you be comfortable using it if it was just one of the optional forms of payment?

I guess I'm struggling with 1.415(b)-1(b) ..."no adjustment is made to the benefit to account for differences in the timing of payments during a year (for example, no adjustment is made on account of the annuity being payable in annual or monthly installments).

B) Other benefit forms. WIth respect to a benefit payable in a form other than a straight life annuity, the annual benefit is determined as athe straight life annuity payable on the first day of each month that is actuarially equivalent to the benefit payable in such other form"

[Mike Preston]

I think Andy was referencing best practice for a plan determining benefits with respect to a period that is not covered by the new regulations.

[Effen]

I guess that is my point... are we all in agreement that you can no longer use annual factors to determine the max 415 lump sum or do you think you can still use the annual factor if the normal form is an annual annuity?

[Mike Preston]

Post-effective date of reg, with respect to benefit accrued AFTER effective date of reg, no can do. Grandfathered benefit as of the end of the plan year beginning in 2007, based on provisions in the plan as of April (5th I think), 2007 can use annual rates if the plan so said.