Appropriate Assumption

[Andy the Actuary]

Assume Plan that covers about 150 participants provides lump sum as greater of PPA and 71GA/PBGC.

A former HCE is age 60 and can retire at age 62 with unreduced benefit. As of 1/1/2009, AFTAP was 73%, which included assumption (right or wrong) that employee would elect lump sum at age 62.

Given the near zero probability that the Plan will be 110% funded in two years, the HCEs benefit will likely be distributed in an annuity form.

Question: Should the FT be valued assuming a lump sum will be paid or should it more realistically assume a monthly annuity form of distribution?

[Effen]

I voted deferred lump sum because you said you were assuming the lump sum would be paid. I think you could change that assumption to something that better fit your situation. I don't think you are required to assume a lump sum payment anytime one is available.

"1.430(d)-1(f)(4)(ii)(A) The probability that future benefit payments under the plan will be made in the form of any optional form of benefit provided under the plan (including single-sum distributions), determined on the basis of the plan's experience and other related assumptions"

[SoCalActuary]

It seems reasonable to assume that the HCEs will get annuities while all others get lump sums.

A 73% AFTAP has a reasonable chance to get 80%. Unless the client really pushes up their contribution, it is not reasonable to assume 110% will occur within the next 2 years.

[david rigby]

IMHO, this is a good example of a need to change an assumption, no longer assuming that an HCE will get a lump sum.

[rcline46]

My opinion is that the HCE will elect a lump sum. The plan cannot pay and therefore will annuitize until a lump sum is available, and then pay the lump sum. Some may think this requires a document change, I think the HCE restriction language specifically permits this. There fore I voted for lump sum.

[Mike Preston]

Do whatever you would do had there not been a potential restriction. That is, ignore the potential of a 436/401(a)(4) restriction when determining assumptions.