HCE was restricted, until plan funded status improved

[John Feldt ERPA CPC QPA]

A restricted top 25 HCE elected a lump sum form of payment at the end of 2008. Suppose the amount due then was $1,000,000. Suppose the unrestricted amount actually paid was $75,000 in 2008, $75,000 in 2009 and $75,000 in 2010.

The plan's funded status has improved and the restriction is now lifted. They will now be paid the remaining portion of their elected lump sum benefit.

Can the plan pay only $775,000 as the remaining benefit due?

The document was not specific about adjusting restricted benefits for interest, but wouldn't there be an interest adjustment required (perhaps due to the definition of 'actuarial equivalence')?

[SoCalActuary]

You must protect the actuarial equivalent of the benefits.

Further, you have Multiple Annuity Starting Date (MASD) issues to consider.

I would absolutely require that the analysis adjust that benefit with interest, but I'm an actuary, so I couldn't even imagine any other method.

[Andy the Actuary]

Operationally, it would be appropriate to maintain a running balance whereby the balance is increased using the segment rates that were determined at the annuity start date. The remaining balance would be the balance held as a liability for purposes of IRC Sections 401(a)(4), 430, and 436, PBGC variable premium determination, and FASB. In short, on paper, we are escrowing within the Plan.

So, assuming an annual distribution, and first segment rate of 5%, you'd have:

Duration Balance Distribution Net After Dist Interest

0 1,000,000 75,000 925,000 46,250

1 971,250 75,000 896,250 44,813

2 941,063 75,000 866,063 43,303

3 909,366

If you don't credit interest, then participant is suffering a forfeiture of benefit by virtue of the restriction.

(sorry, don't know how to get the columns to allign)

[SoCalActuary]

More likely that you would use the plan's post-retirement actuarial equivalence assumptions, unless your plan has a specific late retirement adjustment factor.

If that is a 3-tier rate, those change according to your annuity starting date.