Restricted Benefits and Rollovers

[Andy the Actuary]

AFTAP<60% for a plan that distributes consentual lump sums upon employment termination. Reg. says "if participant elects lump sum, the Plan must permit the participant to elect another form of payment or to defer payment to a later date blah blah blah." Let's say the participant is at NRA. Then payment under the Plan terms must start so deferral is not an option.

Suppose (if the AFTAP < 60% as of the annuity start date) the plan offered a distribution option that provided so long as the AFTAP was <80%, the Plan would distribute the life only portion. At the time the AFTAP >=80%, the Plan would then distribute the then present value of the remaining payments. Thus, there is a single annuity start date and the participant may elect a lump sum payment NOW though it would be deferred to an unknown date

Assuming this option seems feasible, it is presumed that the installment distributions would be paid in cash with voluntary FIT withholding applying and would not be eligible to rollover to an IRA; but the lump sum value of remaining payments would be eligibile for rollover and mandatory 20% FIT withholding would apply if taken in cash.

Thoughts on the above???

[david rigby]

Hmmm. When you value the funding target at next valdate, how do you calculate the PV of this retiree? The prescribed mortality table and interest rates differ for funding compared to LS. Or is that significant?

Would your plan provision have to state that the 80% trigger is after the payment of LS?

[SoCalActuary]

AFTAP<60% for a plan that distributes consentual lump sums upon employment termination. Reg. says "if participant elects lump sum, the Plan must permit the participant to elect another form of payment or to defer payment to a later date blah blah blah." Let's say the participant is at NRA. Then payment under the Plan terms must start so deferral is not an option.

Suppose (if the AFTAP < 60% as of the annuity start date) the plan offered a distribution option that provided so long as the AFTAP was <80%, the Plan would distribute the life only portion. At the time the AFTAP >=80%, the Plan would then distribute the then present value of the remaining payments. Thus, there is a single annuity start date and the participant may elect a lump sum payment NOW though it would be deferred to an unknown date

Assuming this option seems feasible, it is presumed that the installment distributions would be paid in cash with voluntary FIT withholding applying and would not be eligible to rollover to an IRA; but the lump sum value of remaining payments would be eligibile for rollover and mandatory 20% FIT withholding would apply if taken in cash.

Thoughts on the above???

I agree about the tax treatment. 3405 requires the 20% withholding on rollover-eligible payments. The life annuity payments are not in that category.

As to your benefit wording, it makes sense, but it certainly puts a fiduciary burden on the plan administrator and the actuary for the proper and timely execution of the AFTAP certification.

[Andy the Actuary]

Hmmm. When you value the funding target at next valdate, how do you calculate the PV of this retiree? The prescribed mortality table and interest rates differ for funding compared to LS. Or is that significant?

Would your plan provision have to state that the 80% trigger is after the payment of LS?

My understanding is you value for 430 as if restriction does not apply. So, I would probably value one year of monthly payments and then a lump sum deferred one year or value the entire puppy as a lump sum, since we'd only be talking about special treatment for one year.