2 DB plans at once, or 1 old termed DB + 1 new DB

[John Feldt ERPA CPC QPA]

Suppose an employer terminated a DB plan several years ago. The plan was 100% funded, the 100% owner was not even close to the 415 limit and was paid a lump sum based on the low 417(e) rates at the time, which were less than 5.50%. The 415 lump sum limit was not exceeded at the time even though the 417(e) rate was under 5.5%.

The same employer sets up a new DB plan now and the 100% owner will again be accruing benefits. The offset of the 415 limit is the question. Since the 1st lump sum was based on rates below 5.5%, should the "extra" amount (the amount paid which exceeded the lump sum valued at 5.5%) be also considered as part of the offset of the new plan's 415 limit?

Also consider the converse: If the 417 rates were high so the lump sum paid was less than an amount calculated at 5.5%, can the participant get any "extra" accrual to make up for that in the new plan?

What if that DB plan terminated before the 5.5% rules were in effect?

What if the second plan is a cash balance plan?

This may help illustrate what I am asking: If an employer had 2 DB plans at the same time, and each plan accrues 50% of the 415 limit for the 100% owner, the maximum lump sum is still based on the 5.5% interest rates which override the lump sum that would otherwise be required based on the much lower 417(e) rates, right?

I am inclined to say that the rates at the time for the old plan were simply the rates at the time, so just offset the 415 limit in the new plan by the accrued benefit that was paid. Thus, if rates are higher or lower than 5.5% either time, a consistent result might be achieved?

Your thoughts?

[SoCalActuary]

John, interesting post here...

If you have the documentation of the actual accrued benefit at the time of the old plan distribution, it would have to include information about compensation and service history, the actuarial assumptions and the normal retirement age at that time.

That places a burden of recordkeeping that most small employers will fail, IMO.

One alternative is to just look at the LS paid, and compute an equivalent benefit. This also places a burden of picking the assumptions that apply.

I don't have a single best answer on this, Other thoughts?

[John Feldt ERPA CPC QPA]

In this case we actually have a copy of the plan documents/amendments that were in effect at the time the plan terminated.

Our concern remains, when already paid a lump sum with rates below 5.50%, what is the 415 offset for maximum lump sum purposes in the new plan when it is established later?

[SoCalActuary]

Others are free to disagree, but here's my approach:

From that old document, you determined the monthly benefit at NRA equivalent to the lump sum paid.

Adjust that monthly benefit to the NRA of the new plan using the new plan's actuarial equivalence assumptions.

Show this as a benefit previously paid, reducing your new maximum 415 limit.

[frizzyguy]

Others are free to disagree, but here's my approach:

From that old document, you determined the monthly benefit at NRA equivalent to the lump sum paid.

Adjust that monthly benefit to the NRA of the new plan using the new plan's actuarial equivalence assumptions.

Show this as a benefit previously paid, reducing your new maximum 415 limit.

I like this method. I would think anyway to measure and adjust for the "over-payment" method that seems reasonable would probably fly with the IRS. Before I read SoCal's post, I was thinking compute what the 5.5% lump sum would have been, divide it by the lump sum paid and then divide the AB at NRA for the first plan by this percentage. SoCal's method is a lot cleaner.

I tried researching this a bit and then gave up, did anyone find anything concrete on how to handle this situation?

[Mike Preston]

I'm not aware of the IRS specifically authorizing any particular method. Until they do, we all have to "do something reasonable". David MacLennan wrote a scholarly paper on the issue which you should easily be able to find with the keywords BERF, WERF and MacLennan.

One method that I've heard about where the ultimate retirement age is over 62, but not over 65, the first distribution is essentially accrued with interest to age 62 only when determining the $ limit. This would be consistent with the fact that the limitation adjustment between 62 and 65 is currently 1.0.

If the ultimate retirement age exceeds 65, the first distribution is accrued for the number of years between initial distribution and ultimate retirement age reduced by 3.

I know more than one actuary who says that they have used that method and survived an audit on the issue.

I've never had a plan that I used that method on audited. In fact, as it is late and I don't want to go pawing through my records, I may never have used it, either.

But it gives pretty good results.

[frizzyguy]

Thanks Mike, I appreciate the comment.

Here is a link to the paper you were talking about:

http://www.soa.org/library/newsletters/pen...0-maclennan.pdf

[SoCalActuary]

The challenges get much more interesting when you have interest rates that are not 5.5% and you do not use the current mortality table.

Then you must also consider the limitations that use the 5.5% lump sum rule. And retirement beyond SSRA adds limits not to exceed 5% interest.

Retirement before 62 adds limits not less than 5% interest.