Restroactive ASD and Restricted Distributions

[Andy the Actuary]

A DB plan with an NRD=65 has a participant who terminated employment prior to age 65 and is now making application for benefits at age 70. The plan contains retroactive annuity start date language. The NRB is $350 and the lump sum benefit is $64,000. The accumulated life only payments with interest is $28,000. The Plan's AFTAP is 70% so lump sum benefits are restricted to 50%.

Case I.

Participant elects life only benefit, so first payment includes accumulated back payments of $28,000. Whether or not you believe this is a lump sum payment, it is less than 1/2 of $64,000.

Case II.

Participant elects to bifurcase benefit and receive lump sum of $32,000 plus monthly pension of $175. His initial payment is $32,000 (1/2 of $64,000) + $14,000 (1/2 of $28,000) = $46,000. I say no problem since although accumulated back payments are distributed in a lump sum, they do not constitute a lump sum payment (i.e., can't be rolled over).

Any naysayers who wish to argue that accumulated back payments are included with the lump sum when determining the restricted benefit?

[david rigby]

I agree, but I'm not placing any bets on how the IRS will view this.

Good question for the Gray Book?

[Andy the Actuary]

A highly respected local benefits attorney has opined that the accumulated payments constitute a lump sum payment and must be taken into account for 436 purposes. Thus, I conclude in the example you must determine the % such that 1/2 x 64,000 = % x 64,000 + (1-%) x 28,000, or %=11.11%. You would then have the accumulated retroactive payments portion be .8889 x 28,000 = 24,889 and you would solve to determine the future pension amount. You would need to perform this algebra for each option so that the total lump sum of pension cashed plus retroactive accumulated payments = 32,000.

Hard to believe this mess was anticipated.

You would present the benefit option of lump sum of 32,000 plus future monthly pension amounts without presenting how much of the lump sum is accumulated retroactive benefit payments. Only the Shadow knows how you would handle relative benefits options.