Brain Cramp part 2: 436 restrictions

[Guest cbclark]

Oh my. I am reviewing plans for the second go around of "correct" PPA/PRA 2010/MAP-21 amendments and I am tangled up. We have some DB plans with automatic lump sum distributions of $1,000 or less and optional lump sum distributions of up to $5,000 with participant consent. 436 exempts the application of the 50% rule for payments that are not subject to participant consent. Colleague here says that the 50% rule would not apply to these plans because the plans could be amended to have the $5,000 automatic distribution/rollover provision, therefore having a LS distribution up to $5,000 made without consent. Before I go further in the amendment process, any one want to weigh in? Does the 50% apply if the LS >$1,000 and up to $5,000 is at the participant's election? I would love to just accept my colleague's position and move along, but I feel like I need to prod this topic a bit more..............Thanks.

[Effen]

If the value of the lump sum is $5,000 or less, you can pay 100% of it, even if benefit restrictions apply. If the lump sum is > $5,000, benefit restrictions would apply.

[Guest cbclark]

Thanks. I really hate to be a jerk, but the sample amendment from the IRS references the exemption on the benefit that may be immediately distributable to the participant without consent. Our strange language offers the limited lump sum from $1,000 to $5,000 if the participant consents or elects. So I am reading the 'without consent' language literally to mean if the restriction is in place, the most a participant could get is half of his lump sum in excess of 1k up to the plan limit of 5k. So if a lump sum is $4,500 and the restriction is in place, s/he or he could only get $2,250. Which of course makes no sense but there I am, being literal. Thanks again.

[Andy the Actuary]

Does this wording from final 436 reg. help?

The regulations do not address the change made by section 101©(2)© of WRERA ’08, under which the limitations of section 436 do not apply to distributions permitted without consent of the participant under section 411(a)(11) (that is, distributions where the total present value of the benefit is not in excess of $5,000).

The annoying automatic rollover crud is in 401(a)(31) and not in 401(a)(11).

[Guest cbclark]

Thanks. There is 2011 Gray Book Q/A that some folks rely on as almost gospel. Q 30's response in the last line says: "The fact that the plan terms would not result in an involuntary cashout is not relevant."

The example was the same as mine, forced cashout under $1k and permissive between $1k-5k if elected by the participant. I find it kind of shocking that the answer was so cavalier about plan terms but hey, I am just going to go with no reduction but waffle my amendment language such that if there is the application we can say with a straight face, hey the restriction is there. I have had it dinned dunned and banged into my head for decades that the plan terms govern, so it is funny to me that for 436 purposes "immediate distribution without consent" means the same thing as "if a participant elects." Terribly inartful. If what they wanted to say was that the restriction would not apply to amounts that are the maximum that could be forced out whether or not they are forced out, that would have been a lot cleaner. Oh well.

Of course, IRS and DOL minutiea and contradictory positions keep all of us employed. Happy Friday, and for you east coasters, watch out for Hurricane Sandy. I have an image of a giant 1950's teenager with a poodle skirt, spinning that skirt at a sock hop...