Beneficiary Distributions

[rcline46]

Plan could not pay the owner the lump sum as requested due to funding issues, so the plan was paying the life annuity. Owner dies, and plan still owes the lump sum. Beneficiaries still cannot take the lump sum due to funding restrictions.

The question is - do the beneficiaries now 'split' the annuity, or do they get a new annuity based on 1/2 of the lump sum owed and their own ages?

I vote for a new annuity value.

[Effen]

so the plan was paying the life annuity

It sounds like you are saying he retired and elected a life annuity because he couldn't get the lump sum. If so, there is nothing to pay the beneficiaries.

Why do you say the plan still owes the lump sum?

[rcline46]

Participant elected a lump sum, not an annuity. Plan could not pay a lump sum due to the Top 25 restriction. Plan could only pay the annuity equivalent each year.

Therefore, the plan owes the lump sum at the time it can come out of the restriction. Otherwise it is denying a valid benefit.

What happens if the participant dies while the plan is still in restriction? (Another recent thread agreed that the restriction still applies.)

[Andy the Actuary]

1. Was a specific beneficiary designatioin made in respect of the lump sum distribution that is being distributed in installments, or is this designation an older one on file. If so, it is not clear that this prior beneficiary designation applies to your situtation.

2. Since the participant elected lump sum distribution, the Plan is still distributing the lump sum, so would seem if applicable, each beneficiary would split the distribution being paid prior to death until the restriction is lifted whereby the Plan would distribute the remaining balances.

3. However, since plan and election package are totally silent, the Plan needs to seek a legal opinion.

[david rigby]

This is the only Gray Book question I found that was close.

Gray Book 2003-24

Restricted Employees: Payments Under Lump Sum Option and Rollover of Payments for High-25

a) If a “high-25” HCE elects a lump sum currently that cannot be distributed immediately, would this election lock in the interest and mortality assumptions as of the date the benefits would have commenced had they not been restricted under 1.401(a)(4)-5(b)?

b) If the HCE elects the lump sum now but cannot be received due to the restrictions under 1.401(a)(4)-5(b), are the monthly “single life annuity” payments equivalent to the accrued benefit that may be distributed eligible for rollover as the lump sum would be?

RESPONSE

a) The “high 25” limits do not restrict the participant’s choice of option, just the dollar amount that can be paid in any year until the restrictions are lifted. Restricting the payments should lead to a net result for the participant that is similar to actually paying the selected benefit and obtaining a bond or security interest. Thus the plan can provide that the remaining lump sum, including interest at the rate used to determine the lump sum, is payable at the time the restrictions no longer apply. Note that the high-25 limits no longer expire on death. The restrictions continue to apply to the beneficiary until the financial targets are met or the participant is no longer one of the highest 25 paid employees.

b) No.

The above Response is a summary, prepared by representatives of the Program Committee, of the oral responses to the question posed

to certain staff members of the Treasury and IRS, which represent only personal views of the individuals who provided them.

Accordingly, the Response does not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any

taxpayer for any purpose.

Copyright © 2003, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the

material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used

so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent

of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for

inclusion in new collective works, or for sale or resale.

[Guest merlin]

This is the only Gray Book question I found that was close.

Gray Book 2003-24

Restricted Employees: Payments Under Lump Sum Option and Rollover of Payments for High-25

a) If a “high-25” HCE elects a lump sum currently that cannot be distributed immediately, would this election lock in the interest and mortality assumptions as of the date the benefits would have commenced had they not been restricted under 1.401(a)(4)-5(b)?

b) If the HCE elects the lump sum now but cannot be received due to the restrictions under 1.401(a)(4)-5(b), are the monthly “single life annuity” payments equivalent to the accrued benefit that may be distributed eligible for rollover as the lump sum would be?

RESPONSE

a) The “high 25” limits do not restrict the participant’s choice of option, just the dollar amount that can be paid in any year until the restrictions are lifted. Restricting the payments should lead to a net result for the participant that is similar to actually paying the selected benefit and obtaining a bond or security interest. Thus the plan can provide that the remaining lump sum, including interest at the rate used to determine the lump sum, is payable at the time the restrictions no longer apply. Note that the high-25 limits no longer expire on death. The restrictions continue to apply to the beneficiary until the financial targets are met or the participant is no longer one of the highest 25 paid employees.

b) No.

The above Response is a summary, prepared by representatives of the Program Committee, of the oral responses to the question posed

to certain staff members of the Treasury and IRS, which represent only personal views of the individuals who provided them.

Accordingly, the Response does not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any

taxpayer for any purpose.

Copyright © 2003, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the

material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used

so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent

of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for

inclusion in new collective works, or for sale or resale.

So on 1/1/10 Joe, a top-25 HCE retires at age 65, subject to restriction. He elects a lump sum, spouse signs waiver. He also signs a statement that basically says " I want a lump sum, but I understand that I can't get it currently, so I'm accepting all that the law allows. I want to be in the same position I would have been in had there been no restriction on my benefits. If I die before exhausting the full value of my benefit I want the payments to continue to my spouse. If she predeceases me, or if she dies before the full value of my benefit is paid I want payments to continue, etc., etc." Spouse agrees to this as well.

Joe's single life benefit commences at 1/1/10 in the amount of $5000/month. He dies 12/31/10, plan continues to spouse. She dies 12/31/11, plan continues payment to Joe's daughter until 12/31/12. Benefit restriction is lifted at 1/1/13, at which date Joe would have been 68.

Questions:

1. Is this a permissible approach?

2. If so, how do you determine the lump sum payable at 1/1/13? That's a new ASD, so I think you'd have to figure the value of 5000/mo at 68, based on the 417e rates in effect at that time.

3. Would it make any difference if the restriction was due to 436 rather than the Top-25?

[Effen]

Just to throw something else out there… not everyone agrees with the Gray Book response on this issue and would argue that at the very least the Gray Book answer for "a" should be adjusted to say "assuming the plan provides".

A plan cannot pay a form of benefit unless it is in the document. Just because the Gray Book provides a solution, the plan still must provide for the option before it can be paid. If the plan doesn't have any special language providing this alternative benefit form to a restricted HCE, then the HCE’s only choice is to either defer their election, or forgo the lump sum and elect one of the monthly annuity options.

So, getting to Merlin's questions, it would seem that someone could probably draft plan language that would address your issues before they occur. I think there would be many possible ways to handle this.