Restricted Payments

[AndyH]

Under what circumstances is a pension increased by a social security leveling option subject the 436 restrictions?

Is this different than a social security supplement?

What is a QSUPP and is that relevant to this matter?

Can anybody explain how these things are affected for AFTAPS below 80%? The Code is clear as mud, and various conference seminars touch upon these matters but are less than clear. Thanks

[Andy the Actuary]

Under what circumstances is a pension increased by a social security leveling option subject the 436 restrictions?

Is this different than a social security supplement?

What is a QSUPP and is that relevant to this matter?

Can anybody explain how these things are affected for AFTAPS below 80%? The Code is clear as mud, and various conference seminars touch upon these matters but are less than clear. Thanks

Under section 436(d)(5), a ‘‘prohibited payment’’ is (1) any payment, in excess of the monthly amount paid under a single life annuity (plus any social security supplements that are provided under the plan), to a participant or beneficiary, . . ."

"in any case in which the plan’s AFTAP for a plan year is 60 percent or more but is less than 80 percent, a participant is permitted to elect a prohibited payment only if the present value of the portion of the payment that is greater than the amount of the monthly straight life annuity under the plan (and any social security supplement, if applicable) does not exceed 50 percent of the present value of the participant’s benefits (or if less, 100 percent of the present value of the maximum guarantee with respect to the participant under section 4022 of ERISA). For this purpose, present value is determined using the rules of section 417(e) except that, if the plan provides a single sum distribution that is larger

than the present value of the benefit determined using the rules of section 417(e), then that larger benefit is substituted for the present value of the participant’s benefits before applying the 50 percent factor."

These two paragraphs seem to say that (1) the social security leveling option payment in excess of the life only amount constitutes a prohibited payment because the portion to age 62 (or 65) -- the first step amount -- exceeds the life only amount and (2) you're likely okay since the present value of the excess of the first step amount over the life only amount is likely less than 50% of the present value of the participant's benefits. By the way, does anyone elect these any more?

QSUPP is defined in IRS Reg. 1.401(a)(4)-12. I guess a temporary supplement that does not satisfy the definition of QSUPP is the Social Security supplement to which you were referring? Note, the proposed reg. refers to supplement rather than QSUPP, from which you can infer absolutely nothing.

Hope this helps. Andy t. a.

[AndyH]

Thanks, but I'm not completely following. And, yes, we have a bunch of clients with these - and they are selected unfortunately. They tend to be large "yellow brick road" plans that are products of mergers and acquisitions that acquire plans along the way and add their peculiar provisions.

Your quote: "Under section 436(d)(5), a ‘‘prohibited payment’’ is (1) any payment, in excess of the monthly amount paid under a single life annuity (plus any social security supplements that are provided under the plan), to a participant or beneficiary, . . ."

Is a levelling adjustment different than a "social security supplement?" or are they the same animal? If the same then I have not paid "any payment in excess of .........", have I?

Thanks again for your help.

[SoCalActuary]

Thanks, but I'm not completely following. And, yes, we have a bunch of clients with these - and they are selected unfortunately. They tend to be large "yellow brick road" plans that are products of mergers and acquisitions that acquire plans along the way and add their peculiar provisions.

Your quote: "Under section 436(d)(5), a ‘‘prohibited payment’’ is (1) any payment, in excess of the monthly amount paid under a single life annuity (plus any social security supplements that are provided under the plan), to a participant or beneficiary, . . ."

Is a levelling adjustment different than a "social security supplement?" or are they the same animal? If the same then I have not paid "any payment in excess of .........", have I?

Thanks again for your help.

For example, my brother-in-law retired under a GM hourly plan. From age 50 to 62, he gets an extra payment which is a Social Security supplement. Once he reaches 62, the payment automatically reduces, under the regular terms of the plan.

My other brother-in-law retired with a life annuity benefit at age 60. If he had elected, he could have had an extra $1,000 monthly pension from 60 to 65, and reduced his life annuity at age 65 by the actuarial equivalent of the extra payment. That is not a Social Security supplement.

[AndyH]

Thank you. That makes perfect sense.