415 Salary Limitation - Urgent

[Calavera]

Facts:

Hi-3 Year Average Comp - $60,000

Date of Termination 3/15/2012

Benefit Commencement Date – 4/1/2012

Age at commencement - 80

NRA – 62

There is no suspension of benefits

Annual Benefit at age 80 as an actuarial equivalent of Normal Retirement Benefits – $72,000 ($6,000 per month) – over 415 salary limit.

Is it appropriate to start paying $6,000 per month effective 4/1, since total 2012 payment will be $54,000 < 415 annual salary limit, and reduce monthly payment to $5,000 per month effective 1/1/2013?

If not, are there any other options besides paying $5,000 per month effective 4/1/2012?

[Andy the Actuary]

IRS was emphatic some 10 years ago that despite the statute, 415 applies to accrued benefit and not benefit payable. The 2007 final regs codify this position. In such case, benefit would be limited to $5,000. However, there is no reduction to pay benefit in the form of a QJ&S.

[SoCalActuary]

You should have been paying the 100% of pay since age 70 1/2 in any event.

I know, there are exceptions like 242b, etc.

Another option is to make a retroactive annuity payment for past amounts at $5,000 monthly.

[Andy the Actuary]

Not an attorney but suspect SCA's suggestions would require appropriate plan wording. E.g., if the plan provides for a deferred begining date (except for HCEs), then the plan would need to be amended to to allow for an in-service distribution. Ditto, retroactive annuity start date.

[Calavera]

Thanks for quick replies.

Participant is not an owner so commencement at 70 1/2 was not required. Participant is single so there is no J&S option. And of course plan doesn’t have a retroactive annuity language, and in-service distribution language.

Andy, I see the point of accrued benefit is not benefit payable, so $5,000 it is.

If plan sponsor is interested to know when the participant hit the 415 salary limit (last 3 year are the highest) for the purpose of the amending the plan for retro-in-service, would you agree that since the comparison of the actuarially increased last year benefit against total accrued benefit is done on 12/31 that date would be 12/31/2012 (12/31/11 benefits are below the 415 limit)? Or would you say I need to request last year salary payable through 11/30, 10/31, etc. and check every end of the month?

[SoCalActuary]

Thanks for quick replies.

Participant is not an owner so commencement at 70 1/2 was not required. Participant is single so there is no J&S option. And of course plan doesn’t have a retroactive annuity language, and in-service distribution language.

Andy, I see the point of accrued benefit is not benefit payable, so $5,000 it is.

If plan sponsor is interested to know when the participant hit the 415 salary limit (last 3 year are the highest) for the purpose of the amending the plan for retro-in-service, would you agree that since the comparison of the actuarially increased last year benefit against total accrued benefit is done on 12/31 that date would be 12/31/2012 (12/31/11 benefits are below the 415 limit)? Or would you say I need to request last year salary payable through 11/30, 10/31, etc. and check every end of the month?

Your 415 limitation pay is usually defined in the document, and most of mine plans use the entire limitation year as the plan year. Some use the calendar year.

So you should only have to look at the hi 3 for each limitation year.

Discuss the effect of a RASD amendment with the plan attorney to see if they even want to do so.

On a related point, recent IRS discussions on other forums make me believe that the IRS would prefer that you give the participant the full actuarial value of their benefit, looking at year-by-year results. If that requires a retroactive starting date, you would get IRS approval easily.

[Andy the Actuary]

If you can pay the retroactive payments in a lump sum representing 10 years of payment, the issue becomes more complicated for 415 determination purposes because you will be paying part lump sum, part deferred annuity at age 70. Thus, you would have to somehow convert the lump sum to an annuity at age 70 (using regulations that were not even around 10 years ago?) and add to this the deferred annuity of $60,000 (valued at age 70) starting at age 80. I do not believe that the issue is simply limit the ab to $60,000 and pay the lump sum.

Other opinions?

[SoCalActuary]

If you can pay the retroactive payments in a lump sum representing 10 years of payment, the issue becomes more complicated for 415 determination purposes because you will be paying part lump sum, part deferred annuity at age 70. Thus, you would have to somehow convert the lump sum to an annuity at age 70 (using regulations that were not even around 10 years ago?) and add to this the deferred annuity of $60,000 (valued at age 70) starting at age 80. I do not believe that the issue is simply limit the ab to $60,000 and pay the lump sum.

Other opinions?

Review the extensive regulations on MASD and RASD..... Oh never mind, there are none. Contact the IRS for informal guidance.