What is the lump sum limit for 436(d)(5) restriction?

[david rigby]

OK, this is picky. If there is already guidance on this point, please point me to it.

I have not found any direct guidance on this, so I'm suggesting some:

Section 101© or WRERA amended IRC 436(d)(5) by adding this sentence:

"Such term shall not include the payment of a benefit which under section 411(a)(11) may be immediately distributed without the consent of the participant."

411(a)(11)(A) reads"

"If the present value of any nonforfeitable accrued benefit exceeds $5,000 a plan meets the requirements of this paragraph only if such plan provides that such benefit may not be immediately distributed without the consent of the participant."

The WRERA summary by the Congressional Research Service, http://assets.opencrs.com/rpts/R40171_20090129.pdf,

and the Technical Explanation by the Joint Tax Committee, http://www.jct.gov/publications.html?func=...own&id=1252,

both refer to "$5,000".

However, many plans have been amended to change the default payout limit from $5,000 to $1,000.

Once can read the statute very "tightly" and suggest that the 436 restriction applies to the dollar limit in the plan, even if less than $5,000. Alternatively, one can read the committee reports and suggest that Congress meant $5,000, even if the plan uses a lower limit.

I suggest the latter approach. Any thoughts?

[Andy the Actuary]

We faced this issue recently, took the WRERA limit at face, and amended the plan to reinstate the $5,000 automatic cash-out threshold to avoid having these silly restrictions. Client was willing to trade possibility of having to obtain default IRA to avoid restricting lump sums of $1,300 to $650. If technical corrections come through, we will amend the plan to unreinstate!

Given that the purpose of 436 is to avoid fund depletion, it is of interest that a plan can distribute a monthly payment of $16,250 at age 62 but could not distribute the other $650 in the above example if the threshold was $1,000!

It is also of interest that if you had a lump sum of $7,000, you could only distribute $3,500 and not $5,000.

[Mike Preston]

It is my understanding that it does NOT apply to the dollar limit in the plan, so leaving the plan at $1,000 would allow a complete distribution to anybody whose benefit was beneath the threshold ($5,00). Between $1,000 and $5,000 you just need consent.

I agree with the $7k/$3.5k example.

[Andy the Actuary]

Mike, where are "words" upon which your understanding is based? Did you hear JH say this? Or, is it in print?

[Mike Preston]

Like the other 8,453,974 things that are my "understandings" they are based on what I believe after hearing what I've heard, read what I've read and remembered what I happened to have remembered.

But this is a settled issue, as far as I know.

The question is whether anybody has any documentation to the contrary?

[Andy the Actuary]

Had you said, 8,453,971, I would have trusted your answer because of the unlikelihood that you would have made up a prime number that large. But, 8,453,974 makes me skeptical about your tallying accuracy.

[Mike Preston]

As well you should be.

[ak2ary]

of course there is a school of thought that says...after the first distribution, your $7,000 participant will only have a remaining PV accrued benefit of $3500...which can be immediately distributed..so in essence the whole $7,000 can be paid...in essence doubling the $5000 limit to 10,000 under 436

[david rigby]

of course there is a school of thought that says...

Those people need to go back to school.

[John Feldt ERPA CPC QPA]

of course there is a school of thought that says...

Must be a private school - how do we get into that school anyway?

It's true that the cashout rules do not require you to look back at the prior years' payouts to determine if the amount can be cashed out, right? (they used to, but not any more)... Hmmm - seems kinda risky, I don't think I'd do it.