415 Multiple Annuity Starting Dates

[Calavera]

Since multiple annuity regulation is under construction, below are 3 versions of 415 calculations. The goal is to maximize the 3rd lump sum payout. Any comments, suggestions, corrections, your own versions, known IRS objections, etc. are highly appreciated.

Current age – 67

Prior Lump Sum 1 at 51 – 366,413 - (prior DB plan)

Prior Lump Sum 2 at 66 – 1,269,653 - (current DB plan, in service distribution)

What is a maximum 415 lump sum that could be paid at 67?

Version 1:

Using 5.5% and GAR with no pre-67 mortality

Offset1 = 366,413 * 1.055^(67-51) / 10.7588 = 80,213

Offset2 = 1,269,653 * 1.055 / 10.7588 = 124,501

Additional Annuity at 67 = 214,955–80,213-124,501 = 10,241

Additional Lump Sum at 67 = 10,241 * 10.7588 = 110,181

Version 2:

Using 5.5% and GAR for converting to immediate annuity.

Using 5%, GAR and no mortality from payout to 67 to adjust for timing

415 Annuity Equivalent 1 at 51 = 366,413 / 14.6490 = 25,013

415 Annuity Equivalent 1 at 67 = 25,013 * 15.4995 * 1.05^(67-51) / 11.1910 = 75,621

415 Annuity Equivalent 2 at 66 = 1,269,653 / 11.0372 = 115,034

415 Annuity Equivalent 2 at 67 = 115,034 * 11.4934 * 1.05 / 11.1910 = 124,050

Additional Annuity at 67 = 214,955–75,621-124,050 = 15,284

Additional Lump Sum at 67 = 15,284 * 10.7588 = 164,438

Version 3 (Modification of Version 2):

415 Maximum Annuity payable at 51 – 88,488

415 Maximum Annuity payable at 66 – 199,331

415 Maximum Annuity payable at 67 – 214,955

415 Annuity Equivalent 1 at 67 = 25,013 * 214,955 / 88,488 = 60,762

415 Annuity Equivalent 2 at 67 = 115,034 * 214,955 / 199,331 = 124,050

Additional Annuity at 67 = 214,955–60,762-124,050 = 30,143

Additional Lump Sum at 67 = 30,143 * 10.7588 = 324,303

[David MacLennan]

What 415 limit are you adjusting, the comp limit or the dollar limit?

[Calavera]

I am adjusting the dollar limit. This person has over 10 years of service and participation and his salary is over $230k.

[David MacLennan]

A detailed discussion of this issue is beyond the scope of the limited forum here. I would be happy to email you several papers I have written on the subject of MASD adjustments. Send me an email through BenefitsLink.

That said, I can still offer some help. Note that until the MASD regs are re-proposed and finalized, we are operating on good faith compliance during the interim period. So presumably any reasonable method will not result in retroactive problems during the interim period. But terminating the plan ASAP might make sense, so that you don't have problems down the road. It would be prudent to give the client the option of submiting the MASD method chosen for approval with a Form 5310 application (I have never done a 5310 filing like that and don't know how the IRS would approach it).

Choosing among your options is not meaningful, except to say that the 3rd method comes closer to a mathematically sound answer. But the method itself is flawed, as are the methods in #1 and #2. So, getting into a discussion about which is better is IMO a waste of time.

Under a matematically sound method, most of the first distribution can be ignored, since it gets "absorbed" by the 62-65 period where the early retirement factors are equal to one. I would also prefer to see the prior lump sums converted to annuities using the terms of the plan in effect at the time of the prior distribution. Then of course after the adjusting offsets are determined using these annuities, any final lump sum must adhere to the provisions of the plan currently in effect.