Top 25 lump sum restrictions

[YankeeFan]

A participant in a defined benefit plan who is a "restricted employee" because of the Top 25 HCE rules requests a single lump sum. The single lump sum is restricted since after the single lump sum payment would be made, the value of the remaining plan assets is less than 110% of the value of the current liabilities. Furthermore, the PPA lump sum restributions do not apply since the plan's AFTAP is greater than 80%.

Let's assume the current single lump sum is $200,000 and the annual amount of benefit payable to the participant as a single life annuity is $20,000. It is my understanding that the participant can elect the single lump sum and receive $20,000 as an immediate payment for the 2013 plan year. Let's further assume the plan continues to be restricted for 2014 so I believe the participant can receive an additional $20,000 payment for the 2014 plan year. Is that correct? In addition, can someone confirm whether these partial payments are eliglbe for rollover into an IRA?

Let's assume that the single lump sum is no longer restricted for the 2015 plan year. Annual payments of $20,000 have been made to the participant in 2013 and 2014. Exactly how is the remaining lump sum calculated?

Should the original single lump sum (equal to $200,000 based on 417(e) rates) be adjusted for interest and then reduced by the 2 annual payments of $20,000 also adjusted for interest? What interest rate should be used for these adjustments?

Thanks in advance.

[rcline46]

Your assumption for the $20,000 for 2013 and 2014 are correct. As to the LS in 2015 there is some debate. In my opinion the participant is still owed the LS value of the $20,000 Life Annuity, but at his then current age, based on the 417(e) rates and mortality table then in effect. Nice, clean, neat, simple.

[Effen]

Your document really should explain how to do it. Since you know you have the issue, you still can amend the plan to codify your intent.

I think a stricter reading of the document will probably tell you that the lump sum is simply restricted and therefore not an option. Therefore, the plan may not give you any authority to pay the $20,000 benefit unless the participant elects the life annuity. So if they elect a lump sum, and instead of the lump sum you pay $20,000, what exactly is it? Is it a partial lump sum? Is it an installment? Is it eligible for rollover? What if the participant dies, what does the beneficiary receive? What if there is no beneficiary? All of the optional forms of payment must be defined in the document, so what option would they be electing?

Another way to handle it is to add an option specifically for restricted participants that allows them to make an election now, then to change their election at a later date if the restriction is lifted. They could elect a life annuity or a J&S option now, then, if/when the restriction is lifted, they can convert the annuity into a lump sum.

[Andy the Actuary]

Been through this and the legal beagles contend that $20,0000 payment(s) is(are) ineligible for IRA rollover.

[Mike Preston]

Until we get specific guidance on this issue, however, I think the structuring of the distribution pattern is critical to determining whether the first few distributions are ERD's.