Calculating Restricted Amount

[Andy the Actuary]

AFTAP=100%. HCE age 62 has accrued monthly pension payable at 65 of $120,000 annually. Because he has completed 30 YOS, the Plan allows him to take it unreduced at age 62. Plan's lump sum factor is 12.50 which assumes 5% interest; minimum PPA is 11.75. So, lump sum is $1,500,000 (120,000 x 12.50).

The plan's actuarial equivalence for non-lump sum benefits produces an actuarially equivalent benefit of $84,000 annually at 62.

(1) Is amount that can be distributed under 401(a)(4) $120,000 or $84,000? I.e., can subsidy be included?

(2) Let's assume we can distribute $120,000. At the end of year 1, the undistributed balance is

(1,500,000 - 120,000) x (1+i).

Question: What is "i"? Is it 5% or the applicable segment rate or could it be specified in the plan?

(3) Suppose plan lump sum factor is 11.50, so that lump sum is 1,410,000 determined using the PPA 11.75 rate. At the end of year 1, the undistributed balance is

(1,410,000 - 120,000) x (1+i).

Question: What is "i"? Is it 5% or the applicable segment rate or could it be specified in the plan?

(4) Presumably, the remaining balance is used for liability purposes for 401(a)(4), 404, 430, 436, PBGC variable premium, and FASB. Any disagreement?

[tymesup]

We had a similar set of questions recently and the same set of answers. If we worked on large plans, we wouldn't have these problems.