Lump Sum restrictions in plan with employee conts.

[Guest Xerxes]

A plan is facing lump sum restrictions under 436(d)(5) when the 2009 certification is made (surprise!). The plan has mandatory employee contributions but does not pay out in excess of the $5,000 limit unless it is an employee contribution refund. Does the restriction apply to limit the refund of the employee portion of the accrued benefit?

For example, if a participant is not vested they would be entitled to an employee contribution refund only which would obviously exceed 50% of the present value of the $0 vested benefit. Even vested participants with short service may find that the employee contribution portion exceeds 50% of the pv of the total accrued benefit.

A local attorney says the restrictions seem to apply. Doesn't make sense to me, I can't see my client telling their employees they can't get their money back.

What say ye?

[Andy the Actuary]

Your scenario will make the "Best of Congessional Unintended Consequences" highlight reel.

The August 31, 2007 proposed regs. show the following example which appears to factor employee contribuions into the process:

Example 2.

(i) The facts are the same as in Example 1. In addition, Plan A provides an optional form of payment (subject to any benefit restrictions under section 436) that consists of a partial payment equal to the total return of employee contributions to the plan accumulated with interest, with an annuity payment for the remainder of the participant’s benefit.

(ii) Participant Q is not married, and retires at age 65 during 2010, while Plan A is subject to the restriction under paragraph (d)(3) of this section. Participant Q has an accrued benefit equal to a straight life annuity of $3,000 per month. Under the optional form described in paragraph (i) of this Example 2, Q may elect a partial payment of $99,120 (representing the return of employee contributions accumulated with interest) plus a straight life annuity of $2,300 per month. The present value of Participant Q’s accrued benefit, using actuarial assumptions under section 417(e), is $424,800. The present value of the PBGC guarantee payable at age 65 in the form of a straight life annuity is determined to be $637,200 for the purposes of this Example 2.

(iii) Under the bifurcation approach of paragraph (d)(3)(ii) of this section, Q can receive the partial single sum payment available under the terms of Plan A as long as the amount of the single sum does not exceed the unrestricted portion of the benefit under paragraph (d)(3)(ii)(B) of this section. The unrestricted portion of Q’s benefit is the lesser of 50% of the benefit otherwise payable, or the present value of the PBGC guaranteed benefit. Accordingly, the maximum single sum that Q can receive is $212,400 (that is, the lesser of 50% of $424,800, or $637,200).

(iv) Because the present value of the portion of Q’s benefit that is greater than the straight life annuity ($99,120) is less than the lesser of 50% of the present value of benefits (50% of $424,800) and $637,200 (100% of the PBGC guaranteed benefit), the optional form described in paragraph (i) of this Example 2 is permitted to be paid under paragraph (d)(3)(i) of this section.