DB Plan 415 Limit - Lump Sum Amount

[Rolf Trautmann]

Somewhat unique situation for us where a 79 year old participant will have his lump sum benefit limited by the 415 salary limit, so we wanted to confirm our findings.

Male born 7/7/1931

Over 40 years of both Service and Participation.

AB of $12,699 payable as a 10 Year C&L at 12/1/2010.

AB at normal retirement date of 8/1/1996 (age 65) was $5,042 also payable as a 10 Year C&L.

Actuarial increases begin at 4/1 after attaining age 70-1/2 or 4/1/2003.

Plan Actuarial Equivalence is GAM83 and 7%.

High 3-Year Average Salary is $160,521.

Plan provides QPSA without charge.

Single Employer Plan that has about 400 participants.

Plan offers SLA at both Annuity Start Date and Normal Retirement.

We determined his annual 415 dollar limit to be $433,721 and his annual 415 compensation limit to be $160,521, both payable as Single Life Annuities. Based on that, his lump sum limited by IRC Section 415 would be about $1,075,350, which seemed slightly low. Do the above results seem reasonable?

Thanks in advance.

[David MacLennan]

Based on the plan document provisions for lump sums, what are the applicable 417e interest (segment) rates?

[SoCalActuary]

With the participant's benefit capped at 100% of pay, you should also have issued suspension of benefit notices from the time he hit the limit.

[david rigby]

Is there a RMD problem to deal with?

[Rolf Trautmann]

Stability period is the Plan Year, which begins 6/1/2010.

Look Back Month is the 2nd month preceding the Plan year or April 2010.

417(e) rates used were 3.26%, 5.24%, and 5.76%.

The Suspension of Benefits notices were provided.

He was an Active participant throughout, Plan did not required Actives to start RMDs, so no RMD issues.

Thanks for the questions!

[Rolf Trautmann]

If there is any additional information neeeded to determine the amount, please let me know.

[Rolf Trautmann]

Please confrim that the 415 limit of $1,075,350 seems reasonable!

Thanks in advance!

[carrots]

Rolf:

Isn't the lump sum = (160,521 / 12) x 79.1797 = $1,059,167?

That's using 7% and the 2010 Applicable Table.

[Calavera]

I got 415 lump sum as 160,521 x 7.104333 = 1,140,395 using 5.5%, age 79 and 2010 applicable mortality table.

[Rolf Trautmann]

carrots,

Thanks for the response. Although, I am not sure why the factor would come from the RP2000 (projected to 2010) mortality table and 7% interest. I would appreciate it if you could explain why.

It would seem like the factor would be the smaller of the factors from the following (or does none of the following apply since it is specific to the 415 Dollar limit calculation? ):

1.) Plan's Actuarial Equivalence, which is the GAM83 mortality table and 7% interest;

2.) Applicable mortality table, which is RP2000 (projected to 2010) and 5.5% interest; and

3.) Applicable mortality table, which is RP2000 (projected to 2010) and applicable interest, which is 3.26%, 5.24%, and 5.76% with the rsulting factor multiplied by 1.05.

Another wrinkle is can an annual annuity factor be used instead of a monthly annuity factor? This would provide a larger lump sum for the participant.

If the above is not applicable, is the lump sum simply the $160,521 times the lump sum factor used in all of the Plan's benefit calculations, which is the greater of the factor using the Plan's Actuarial Equivalence and the factor using the 417(e) applicable interest rate and mortality? Again, could the annuity factor be annual instead of monthly?

Thanks again in advance to anyone that can help clarify this.

[Rolf Trautmann]

Calavera,

Do you have a reference as to why you would use only 5.5% and RP2000 projected to 2010?

Thanks

[carrots]

Rolf:

So - it looks like I need to update the scrap of paper, in my top left draw, that tells me how to do this!

I think you are correct in applying the lesser of the three results under Reg 1.415(b)-1©(3).

That ends up with 7% and the 83GAM table, and ($160,521 / 12) x 68.6311 = $918,061.

I wouldn't, personally, use an annual annuity-due factor - since this benefit is monthly. But, you could amend the plan's actuarial equivalence to, say, 5.5% and the Applicable Mortality Table, if you want a larger lump sum.

[Calavera]

Rolf,

I agree that it should be lesser of the three factors. I was under the assumption that Plan's Actuarial Equivalence (GAM83-7%) is for the late retirement increases and not for the lump sum calculations. If your plan defines lump sum factors as applicable interest/mortality, the 5.5% factor will win. If your plan defines lump sum factors as 7%/GAM83 then plan factor wins.

[Rolf Trautmann]

Calavera,

Thanks for the confirmation. Yes, the Plan's actuarial equivalence for everything is GAM83 (50% Male/50% Female) and 7.00% interest.

Do you or anyone reading this have any thoughts on using annual annuity factors since 415 is based on an annual benefit limit? We found an article written by David MacLennan in the January 2006 Pension Section News titled "Adjusting IRC 415 Limits for Prior Distributions" which seemed to indicate that annual factors are allowed. Specifically it includes the following "Commutation factors based on annual payments are used since the Code refers to annual payments (annual payments yield larger lump-sums)."

Thanks in advance.

[carrots]

Rolf:

David appears earlier on this thread. I think you can click on his name and send him a personal message.

[Rolf Trautmann]

Carrots,

I totally missed that. I will contact David about that issue.

Thanks, for pointing that out.

Rolf

[Calavera]

Do you or anyone reading this have any thoughts on using annual annuity factors since 415 is based on an annual benefit limit?

According to 1.415(b)-1(b)(1)(i)(B) you should use monthly annuity factor:

(B)Other benefit forms.—

With respect to a benefit payable in a form other than a straight life annuity, the annual benefit is determined as the straight life annuity payable on the first day of each month that is actuarially equivalent to the benefit payable in such other form, determined under the rules of paragraph © of this section.

Now, regarding the Plan's actuarial equivalence for everything, which is GAM83 (50% Male/50% Female) and 7.00% interest. I maybe over thinking, but if your plan states that an actual lump sum payable under the Plan will use greater of the two factors: GAM83MF/7% and Applicable Int/Applicable Mort, wouldn't you use the greater of these two factors for 415 purposes under the "test 1" (plan's actuarial equivalent).