415 High-3 Limit

[JAY21]

I know this is an old issue but does anyone take the position the IRC 415 high-3 limit cannot go down in present value after the NRA ? Example:

Sole Owner/Participant has NRA of 62 and has 10/10ths of his High-3 Limit (which is less than the dollar limit) at age 62 but does not retire and does not electo take post-NRA in-service distributions. He later funds a large amount leaving the plan somewhat over funded and with economy downturn shortly after that he cannot increase his High-3 comp average. Thus, his highest PV of IRC 415 was at age 62.

Is there any argument to preserving the IRC 415 High-3 Present Value at age 62 or must I use the PV at age 65 since his comp average did not increase after age 62 and the annuity factor at age 65 is smaller than at age 62.

Thanks for any thoughts and opinions. Client might be inclined to be a little agressive if there is any arguement at all for the PV at age 62 but if that's clearly a 415 violation he'll use the PV at age 65.

[SoCalActuary]

This situation requires a notice of suspension of benefits.

[Andy the Actuary]

Unfortunately, it appears the answer is PV65. This is simply one of those "ain't fair, ain't right" rules.

Had one of these a long time ago had taken over years ago where particpant was 70 and should have walked 5 years prior owing to 415(b)(1)(B) restrictions. One suggestion was since 90-95% of excess assets would go to our favorite uncle, why not take on significant, high reward investment risk with excess?

If it failed, you'd lost 5%. If it hit, then you would end up with 5% of some very large number. Seemed very perverse to me.

[david rigby]

Why not just take the (periodic) distribution?

[Andy the Actuary]

Yes, if married, could provide as J&100%. However, this means keeping the Plan alive indefinitely (unless annuity premium eats up excess). This becomes annoying (fees, finding replacement actuaries, etc.) as well as the plan could later require funding. And the $64 dollar question, what do you do with remaining assets once last survivor has died?

[David MacLennan]

Yes, the PV gets smaller as one gets older, that is the nature of the 415 comp limit.

Assuming the 415 limitation year is the calendar year, why don't you take one year's distribution equal to the 3-yr high average comp, prior to Dec 31. So for example, if your 3-yr average comp is $75,000, distribute $75,000 as a lump sum. Then taken another $75,000 in 2010. You would of course need to recognize these create MASD's, and 415 MASD rules are not nailed down right now - but the distributions I just mentioned will not lower the 415 comp limit. You said the plan is only "somewhat" overfunded, so this approach should help a lot. It should have been started at 62 at the first hint of overfunding - better late than never. Forget the annuity idea, IMO. Also, you can't go further with my suggestion and claim retroactive distributions for earlier years, IMO.

[JAY21]

Thanks for the good input.