Lump Sum basis for small db plan

[Guest Linda B]

I have a small db plan (4 employees, owner-family) that is terminating. We are amending the plan to provide for lump sums. While we know we need to provide PPA basis lump sums at a minimum, and 415 lump sums as a maximum, we'd like to define the basis as the interest rate that will exhaust all plan assets on the termination date. The 4 participants have all elected a lump sum. Has anyone done this, can it be done legitimately in a plan document, and if so, how would we word the amendment to define the interest rate?

[Andy the Actuary]

Whether or not this would work for your client, it may simply be easier to amend the plan to allocate excess assets to the Plan participants. Then, you can figure out some nondiscriminatory way. For example, you might allocate the excess -- subject to IRC 415 -- based upon the present value of the non-integrated portion of the benefit without regard to any top-heavy minimum. I've yet to see a DB that codifies specifically how excess assets will be allocated. Thus, you can have your spread sheet in place awaiting your assets at point of distribution. This should work much better than trying to determine an actuarial basis to fit your assets. This is especially true if someone elects an annuity.

[david rigby]

I agree w Andy. His suggestion is pretty common, and (actuarially) simple.

[Guest Sieve]

Not to imply, of course, that Andy T.A. is either common or simple (actuarially or otherwise)!!

[mwyatt]

Wholeheartedly agree w/ the excess asset reallocation. Let's say that you craftily devised an actuarial basis that fit your asset model to a tee as of September 30, 2008 for example. You've now created an underfunded plan if you went with that solution...