Determining Lump Sum Distribution

[Dougsbpc]

Our administration system provides present value factors to determine lump sum benefits at various ages based interest rates and the mortality table input. The factors are calculated for AE and 417(e).

A friend who works at a plan admin firm recently sent us a copy of the questions asked on a PBGC post-termination audit. One of the questions asked for the interest rates, mortality table and age methodology used in determining lump sum distributions (age last, age nearest or interpolation).

We will be terminating a 30 participant DB as a standard termination. If a participant is 47.765 years old at the date of distribution, must we interpolate between the factors at age 47 and 48? How about just using age nearest to the nearest month? Or what about age last birthday?

The document is silent on the age methodology issue.

Thanks for any input.

[Andy the Actuary]

Why wouldn't you simply continue the past practice that has been used to determine age (e.g., for benefit calculations)?

[Dougsbpc]

We would like to, but in reading some of the past threads on this, many believe you must provide interest right up to the day the lump sum distribution is paid. If using present value factors (which is what we have been doing after PPA segment rates), this would mean interpolating. We have consistently been using attained age.

Again, the document is silent on this and we have not found anything that states you must use a specific method. Does anyone know of an authoritative source (regulation etc) that clarifies this?

[Andy the Actuary]

We would like to, but in reading some of the past threads on this, many believe you must provide interest right up to the day the lump sum distribution is paid.

Many don't.

[david rigby]

I agree with Andy. Be consistent in your use of rounding and interpolation. If necessary, write it down and treat it as an administrative practice.

[Blinky the 3-eyed Fish]

We have consistently been using attained age.

So if someone is age 49.8 are you assuming they are 49.0?

Again, the document is silent on this and we have not found anything that states you must use a specific method. Does anyone know of an authoritative source (regulation etc) that clarifies this?

Other than the 415 regs stating you use age month last, no.

[Dougsbpc]

Yes. Age 49

Age month last meaning the age as of the month containing the last birthday?

[Blinky the 3-eyed Fish]

I personally would never use age last. Participants always receive a lower distribution amount almost every time under that method versus an age nearest method.

Keep in mind the 415 regs apply to 415 calculations only, but yes, what you said. So if someone was born 6/7/1950 and it's 5/5/2010, they would be 59 10/12.

Outside of 415 I personally use age nearest month. I feel that it's accurate enough to actual age without causing any timing issues that a more specific timeframe would cause.

[Dougsbpc]

I agree. We will probably be using age nearest from now on.

Out of curiosity, could the IRS or PBGC (in the case of a plan termination audit) really force you to use age nearest or exact age when the plan document, code and regulations do not specify you must?