417(e) Calc for non-lump sum

[JBones]

Am I doing this correctly? I haven't done any 417(e) calcs using segment rates other than lump sums, so I wanted to be sure that I'm not missing something.

Facts:

Participant age = 71 = normal retirement age

Normal Retirement Benefit = $10,000

Plan normal form is single life annuity

A.E. is 5.0% interest and 94 GAR mortality (post retirement only) (age 71 a.p.r. = 119.2314)

417(e) factors are 2.47%, 5.07%, 6.10% - mortality is RP11CU (age 71 PV factor = 122.9886- assume this factor is correct)

Participant elected 26 year term certain annuity so they will receive the greater of 1) and 2) below:

1 - plan basis: $10,000 x 119.2314 / 15.0939 (26 year term certain annuity at 5%) = 78,993

2 - 417e basis: $10,000 x 122.9886 / 14.8326 (26 year term certain annuity with first 5 years at 2.47%, next 15 at 5.07% and the remaining years at 6.10%) = 82,918

In this case the participant receives the amount under the 417e factors of $82,918 annually.

Thanks in advance.

[frizzyguy]

A 71 year old electing a 26 year certain annuity? Am I getting punked? Ashton, is that you?

Just at a quick view, I think you are using an annuity function payable montly for the straightlife and annually for the certain annuity. Just quickly using good old excel, I get 176.423 for the 5% annuity. I very well could be over looking something though.

[Effen]

I'm pretty sure there a rule that says the period certain cannot exceed the life expectancy.

I don't believe the plan would be permitted to pay a 26-year certain and life annuity to a 71 year old.

[SoCalActuary]

I'm pretty sure there a rule that says the period certain cannot exceed the life expectancy.

I don't believe the plan would be permitted to pay a 26-year certain and life annuity to a 71 year old.

But you should also check the joint life expectancy with his spouse.

[JBones]

The 401(a)(9) regs state in 1.401(a)(9)-6 Q&A that distribution must be paid in the form of periodic annuity payments for the employees life or "over a period certain that does not exceed the maximum length of the period certain determined in accordance with A-3 of this section."

In A-3 it says "The period certain for any annuity distributions commencing during the life of the employee with an annuity starting date on or after the employee's required beginning date generally is not permitted to exceed the applicable distribution period for the employee (determined in accordance with the Uniform Lifetime Table in A-2 of §1.401(a)(9)-9) for the calendar year that contains the annuity starting date."

The Uniform Lifetime Table has a distribution period of 26.5 for a 71 year old.

26 is less than 26.5. Am I missing something here?

Frizzyguy - the plan's normal form of benefit is a monthly life annuity and I am converting to an annual term certain annuity, so isn't that the correct calculation? Multiply by the factor using the plan form of benefit and then divide by the factor for the optional form of benefit?

[Effen]

Wait a minute, lets start over. Are you trying to:

1) determine the amount of a life annuity with 26 years certain

2) determine the amount of a 26 year annuity (no life). If it is just the 26 year certain, why are you factoring in a mortality table?

3) Are you doing the relative value calculation and need the 417(e) stuff for comparison purposes?

Anyway, using 1994 Group Annuity Reserving Table adjusted to a unisex basis projected to 2002 as published in Rev. Ruling 01-62 at 5% I get 177.77 for life with 26 years certain to a 71 year old. (177.139 for just 312 monthly payments)

Using the 2011 417(e) mortality with segment rates of 2.47, 5.07, 6.10, I get 175.08 for life with 26 years certain. (174.578 for just 312 monthly payments)

But I'm still a bit confused about what you are trying to determine and why.

[JBones]

Wait a minute, lets start over. Are you trying to:

1) determine the amount of a life annuity with 26 years certain

2) determine the amount of a 26 year annuity (no life). If it is just the 26 year certain, why are you factoring in a mortality table?

3) Are you doing the relative value calculation and need the 417(e) stuff for comparison purposes?

Anyway, using 1994 Group Annuity Reserving Table adjusted to a unisex basis projected to 2002 as published in Rev. Ruling 01-62 at 5% I get 177.77 for life with 26 years certain to a 71 year old. (177.139 for just 312 monthly payments)

Using the 2011 417(e) mortality with segment rates of 2.47, 5.07, 6.10, I get 175.08 for life with 26 years certain. (174.578 for just 312 monthly payments)

But I'm still a bit confused about what you are trying to determine and why.

I am converting a monthly single life annuity to an annual term certain annuity (no life).

I thought that involved:

Plan Basis: Monthly s.l.a. x plan s.l.a. apr at retirement / term certain factor at plan interest

417(e) Basis: Monthly s.l.a. x 417(e) s.l.a. apr at retirement / term certain factor at 417(e) rates

Even though its 26 year certain, don't you develop a lump sum at retirement using the 417(e) rates (which would include mortality) and then divide that lump sum by the term certain factor?

[Effen]

Sorry, I'm just an idiot. Probably trying to do to many things at once.

I guess the theory is the 26-year certian is subject to 417(e) and therefore needs to have the same value as the lump sum.

Is the plan lump sum based on the greater of 5% or the 417(e) rate or just the 417(e) rate?

If it is the greater of, than I think the 5% would produce a larger lump sum, but lets assume the lump sum is solely based on the 417(e) rates. If it is based soley on the 417(e) rates, then I think the 26-year certain would be 10,000 * 122.9885 / 174.578 = 7,044.90/month for 312 months.

Obviously this all needs to be in the document, which means you need to offer it to everyone else who retires.

[JBones]

Sorry, I'm just an idiot. Probably trying to do to many things at once.

I guess the theory is the 26-year certian is subject to 417(e) and therefore needs to have the same value as the lump sum.

Is the plan lump sum based on the greater of 5% or the 417(e) rate or just the 417(e) rate?

If it is the greater of, than I think the 5% would produce a larger lump sum, but lets assume the lump sum is solely based on the 417(e) rates. If it is based soley on the 417(e) rates, then I think the 26-year certain would be 10,000 * 122.9885 / 174.578 = 7,044.90/month for 312 months.

Obviously this all needs to be in the document, which means you need to offer it to everyone else who retires.

I need to check the document to confirm whether the plan lump sum is the greater of, but have to run out now. In the mean time, the optional form is in the document and will be offered to all participants.

The participant is electing to have annual payments, rather than annual. Your calculation appears to be using a monthly term certain factor which would give a different result than mine which uses an annual factor, i.e. an annual factor is not the same as a monthly factor x 12.

In any event, it looks like you agree that the basic mechanics of the calculation are correct?

Also, was it determined if 26 years was an acceptable length of time for the certain period?