Rollover: Pymt. Independent from Series of Substantially Equal Periodic Pymts

[Guest TCP]

If it is determined that a retired participant, who is receiving a series of substantially equal periodic payments under a qualified plan, was underpaid on those periodic payments for several years, due to an error of the plan administrator, will a lump sum payment to correct prior underpayments qualify as eligible for rollover to an IRA ? In addition to the lump sum payment, the participant will continue to receive future substanitally equal periodic payments, adjusted to a higher amount to reflect the corrected periodic amount.

Reg. 1.402©-2 Q&A 6 seems to say yes, in the A-6(a) definiton of "independent payment" and in A-6(b)(2) which defines payments that are not treated as "independent payments"......but, A-6(b)(1) provides that if the payment is "due solely to reasonable administrative error or delay in payment" it will not be considered independent. I find no definition of "reasonable administrative error". Would the fact that a favorable court ruling was necessary for this participant and numerous others to receive the payments rise above "due solely to a reasonable administrative error" to qualify the lump sum portion of the settlement as an eligible rollover ?

And hopefully a less complicated question: What does the term "less than or equal to the greater of 10% of the annual rate of payment of the annuity ". as referred to in Reg. 1.402©-2 A-6(b)(2)(iv) mean ? Is it simply 10% of the total scheduled annuity payments for the latest one year period ?

Thanks for your help.

[JanetM]

My first question would be does the plan allow lump sum? I don't think the payment, a retroactive one to make up missed payments would qualify for rollover.

[Guest TCP]

My first question would be does the plan allow lump sum? I don't think the payment, a retroactive one to make up missed payments would qualify for rollover.

Janet, Thanks for the reply.

On your question, I'm checking for verification, but my understanding is that for the years where the montly payments were underpaid, a lump sum was not an option. In years subsuqent, a partial lump sum with a reduced monthly payment was added to the plan for new retirees.

Is your reason for saying that you don't think it would qualify, that you think that the plan would have had to have a lump sum payment option as a form of benefit or some other reason ?

[JanetM]

I don't think a lump sum payment that is being made as retroactive payment for payments due in prior period is technically a lump sum one time payment.

Think of it this way. Person is eligible to draw retirement 3/01/07. You actually start them now (yes you did all the RASD stuff) and give them on check first off for the 13 months (March 2007 to March 2008), this first payment is not eligible for rollover.

[Guest TCP]

I don't think a lump sum payment that is being made as retroactive payment for payments due in prior period is technically a lump sum one time payment.

Think of it this way. Person is eligible to draw retirement 3/01/07. You actually start them now (yes you did all the RASD stuff) and give them on check first off for the 13 months (March 2007 to March 2008), this first payment is not eligible for rollover.

Yes, I see your point and I agree that the example you give could fall under the special rule in Reg. 1.402©-2 A-6(b)(1) as being "due solely to reasonable administrative error or delay in payment" and not be considered as an "independent payment". That would make such a payment not eligible as a rollover.

Consider this: I can find no definition of "reasonable administrative error or delay", but let's assume that the fact that (a) some of these underpayments stretch over 20 years and (b) the issue of an underpayment was contested by the administrator and the courts ruled in favor of the particpant to require the lump sum payment, takes it out of the definition of "reasonable administrative error or delay".

That could leave us with either a Reg 1.402©-2 A-6(a) "Independent Payment" by reason of not being caused by a "reasonable administrative error or delay" or not meeting the Reg 1.402©-2 A-6(b)(2) definition of a "Supplemental Payment for Annuitants" since it does not meet the condition of subparagraph (I) it is not a benefit increase or subparagraph (IV) the aggreagate is more than the greater of 10% of the annual rate of payment for the annuity or $750.

*Since I can find no defintion, I am assuming that "10% of the annual rate of payment for the annuity" is 10% of the most recent 12 monthly payments ??

Also, PLR 9718037 could address the "retroactive payment" concern you expressed wherein it allowed the rollover of "retroactive benefits and accured interest" where a widow who remarried was deemed under state law to no longer be eligible for state retirment beneifts as a surviving spouse, but when that law was changed by the state, the widow received a settlement of "retoractive benefits and accured interest" for the period she was deemed ineligible under prior law and did not receive the payments as a surviving spouse. That was ruled to be eligible for a rollover.

[Guest TCP]

Any other thoughts ?

The key to the answer seems to be:

(a) Is the use of the wrong mortality tables for 20+ years by the plan administrator, resulting in underpayments to 1,000+ participants, where the administrator was ordered to make corrective lump sum payments when he lost on appeal on both the fact that there was an underpayment and on trying to limit the payments to a 6 year statute of limitations considered to be more than "due solely to reasonable administrative error or delay in payment"

I think the 20+ years knocks out "reasonable administrative....delay in payment"; What about "reasonable administrative error" ?