Early Lump Sum

[Pension RC]

If a 55 year-old participant is eligible for an early retirement, normal retirement is age 65, there are subsidized early retirement factors, and you are calculating his immediate lump sum, it seems to me that the participant should receive the greater of four lump sums:

1) The age 55 present value of the age 65 normal retirement benefit, based on the plan's actuarial equivalence,

2) The age 55 present value of the age 65 normal retirement benefit, using 417(e) assumptions,

3) The age 55 present value of the immediate subsidized early retirement benefit, based upon the plan's assumptions, and

4) The age 55 present value of the immediate subsidized early retirement benefit, based upon the 417(e) assumptions.

Does anyone agree/disagree?

Thanks!

[AndyH]

I think 1 and 2 are required, but not 3 and 4 unless the plan so states.

Having said this, I was once told by an actuary that I respect that an IRS regulation (I don't remember the cite) does require 3 and 4. I never found it. Has anyone else?

[david rigby]

This might help.

Gray Book 2006-33

Other DB Plan Issues: Early Retirement Benefits and Minimum Lump Sum Requirements

A qualified defined benefit plan provides lump sum benefits (non-small-amount). For employees eligible for early retirement, the plan states that the lump sum benefit is the larger of:

(i) The present value of the immediate annuity commencing at the participant’s early retirement date calculated using the plan’s general basis for actuarial equivalence -- the applicable mortality table and 7%, and

(ii) The present value of the participant’s deferred annuity commencing at normal retirement age using the applicable mortality table and the applicable interest rate.

Does this plan meet the minimum lump sum requirements of ERISA and the Internal Revenue Code?

RESPONSE

No. Under regulation §1.417(e)-1(d)(1), the applicable interest rate and mortality table must be used to determine the minimum value of any benefit that is valued. Thus, a third value would need to be considered in this scenario – the present value of the early retirement benefit using the applicable interest rate and applicable mortality table.

[Pension RC]

Thank you for these responses. So are you saying that, IF the plan considers the early immediate annuity, then you must consider the 417(e) assumptions as well, but if the plan doesn't require one to consider the early immediate annuity, then you could simply use the greater of the deferred normal retirement benefit based upon plan assumptions and the deferred normal retirement annuity based upon 417(e) assumptions?

[david rigby]

The "Response" above indicates the use of the ER benefit and an immediate LS factor. But the Regulation cited does not mention ER, only NR.

A bit confusing. So far, I have no other cites.

[AndyH]

The plan in the Gray Book states that the lump sum is the greater of the immediate or the deferred. The original question does not seem to pre-suppose this.

Clearly if the plan states that the greater of immediate or deferred is required, then 417(e) must be satisfied, and 1-4 must be checked. The issue I am bringing up is whether the plan must state that the immediate is considered. If it does not, if the plan says that it is the deferred only, is that ok? As far as I know it is.

[Andy the Actuary]

Wasn't one of the principal reasons the relative value regulations were issued was to ensure participants were aware that early retirement subsidies weren't included in the lump sum calculation?

[Effen]

I think we are all saying the same thing.

1) You only need to include the value of the early retirement subsidy in the lump sum IF the plan says you do. Nothing in the regulations require you to include it, therefore, if the document is silent, you should ignore it.

2) If there is a subsidized early retirement benefit, the relative value disclosures should be providing clear information that the value of the lump sum is lower than the value of the immediate annuity.