415 limit for frozen plan

[Calavera]

New spin on the old question.

NRA is 62. Small plan was frozen when participant was 52 years old in 2003 with 10+ years of service and participation. Given the IRS position that 415 applies to the accrued benefit and there was no special language in the freeze amendment, the final annual accrued benefits are $160,000 (2003 $415 limit). Plan is terminating now in 2013, and participant is 62 years old.

What is his allowable lumpsum?

Step 1: Calculate lump sum under the plan's assumtions (417 October rates for prior year)

160,000 x 14.7734 = 2,363,744

Step 2: Under 1.415(b)-1©(3) the actuarially equivalent straight life annuity benefit is the greatest of:

a) 2,363,444/14.7734 = 160,000 (plan's rate)

b) 2,363,444/12.4228 = 190,251 (5.5% rate)

a) > b) = 190,251

Step 3: Verify whether 190,251 is above or below $415 limit to confirm if I can pay 2,363,744 lump sum. Question is if I am still stuck with 160,000 limit, and therefore lump sum is limited. Or I can use $205,000 for this purposes since it has nothing to do with the accrued benefit, and therefore lump sum is NOT limited.

[david rigby]

Is this a one-person plan, esp w/ any excess assets?

If so, amend to unfreeze?

[Andy the Actuary]

My understanding that 415(b) limit applies to limitation year, which in your example would be 2013. Thus, while the AB would have been determined as $160,000, the lump sum value when converted to an equivalent life annuity would be compared to $205,000.

[Calavera]

Thanks guys.

David, It is not a one-person plan. Owner just want to contribute up to the maximum he would be allowed to take as a lump sum after everybody else is cashed out.

Andy, I am glad that you are thinking what I was thinking. Hopefully nobody else thinks otherwise.

[Effen]

Be careful of the rules related to the timing of a plan amendment or series of amendments has the effect of discriminating significantly in favor of HCEs (1.401(a)(4)-5). The allocation of excess assets is considered a plan amendment that must comply with the applicable non-discrimination rules.

What you just described fits the perfect example of what this rule is targeting. I would not want to be on record as the one who recommended it.

[Andy the Actuary]

Agree with Effen. I was thinking one-person plan as well. Still, so long as the present plan language does not conflict with my earlier opinion, I'll stick with it.

[Calavera]

Good point Effen, but my situation is different. There is no excess asset and the owner just want to contribute what he can take out. So consensus for now that the actuarially equivalent straight life annuity benefit of his lump sum is compared to the current $415 limit and not to the $415 limit at the time of plan freeze.

FYI - I also discovered that if plan was terminated in 2013 and distribution occur in 2014 you have to use the 2013 $415 limit and not the 2014 $415 limit.

[Effen]

I'm sorry, but you said, "just want to contribute up to the maximum he would be allowed to take as a lump sum after everybody else is cashed out".

Now you are saying, "there is no excess asset and the owner just want to contribute what he can take out"

Is the plan currently frozen? I think you said it was frozen in 2003

Does the plan currently contain sufficient to cover the frozen accrued benefit? If not, he can contribute enough to cover that accrued benefit without concern of 1.401(a)(4)-5.

If he "contributes up the maximum" I assume the plan will have more assets than it needs to provide the previously frozen accrued benefit.

If you then re-allocate those excess assets to him, the re-allocation of those excess assets is considered to be a plan amendment that must comply with 1.401(a)(4)-5.

The fact that you said the plan was frozen, then you were asking about his current 415 limit, lead me to believe that he ultimately planned to receive more than the value of his previously frozen benefit. If this is true, I think you need to consider 1.401(a)(4)-5. If he is just going to make a contribution to bring the assets up to cover his previously frozen benefit, I think you are ok.

[Calavera]

I guess it was a poor choice of using word "maximum". I didn't mean the maximum deductible contribution. I meant enough to cover the value of his frozen accrued benefits. The question really was what is the maximum lump sum he is allowed to receive under the 415 rules. It was either the present value of $160,000 or the present value of $205,000.