415 Lump sum limit

[Guest DBStudentAct]

My firm has taken over a small plan with 5 participants this year. I am now working on one of it's lump sum benefit calculation.

When I cross-checked the prior actuary’s calculation that was done for another lump sum calculation last year, I found that the final LS paid out was not limited by the 415 LS limit. Am I missing something here since as per my knowledge all lump sum calculations need to be capped by the 415 LS limit or is it that only if the accrued benefit is limited by the $ or compensation limit is the LS 415 limit calculated? Please help me understand this. Are there certain categories that are exempted from the 415 LS limit?

Thanks in advance for all your help.

[Effen]

No, the LS should have been restricted to the 415 maximum regardless of the amount of the monthly AB.

It makes for a delicate take over, but you should notify the client of the issue and make sure it doesn't come back on you if they choose not to correct it.

[ubermax]

You want to make sure that you're calculating the max correctly also - I posted the following awhile ago on another forum when $195,000 was the dollar limit & it assumes commencement between 62 & 65 ; some of it would have to be modified if you're using the pay limit and/or an age outside the noted range - hope this helps - good luck !!

per the 415 regulation , given a lump sum the SLA equivalent for determining if 415(a) is violated is max( a,b,c) where,

a = LS/(APR(plan i , plan u)) b= LS/(APR (5.5%, app u)) c= LS/(1.05 (APR(app i , app u)))

now, max (a,b,c) implies that one or more of the above denominators is the smallest; so if we vary LS until at least one of a,b,c reaches 195,000 , then that APR * 195,000 is the maximum lump sum .

said another way, starting with the 415 SLA dollar limit , the max PPA lump sum using the current dollar limit is :

195,000 * min { APR(plan factors), APR ( 5.5% & app u), 1.05 APR (app factors) }

[Effen]

Coming back to an older question - if my plan allows for annual annuity payments, am I ok using annual annuity factors to determine the 415 limit?

If my plan does not permit annual payments, do I have to use monthly factors?

I think the answer to both is "yes", but I am hoping for confirmation.

[david rigby]

Effen, to my surprise, it appears your question was addressed in the Gray Book.

QUESTION 2009-16

Section 415: Effect of Annuity Frequency on Age-Adjusted Dollar Limit

IRC §§415(b)(2)© and 415(b)(2)(D) provide that the dollar amount limit in §415(b)(1)(A), $195,000 for 2009, is reduced if payments start before age 62 or increased if payments begin after age 65. Regulations §§1.415(b)-1(d) and 1.415(b)-1(e) specify that the age-adjusted dollar limit generally is determined as the actuarial equivalent of the annual amount of a straight life annuity commencing at the annuity starting date that has the same actuarial present value as a straight life annuity equal to the dollar limitation of §415(b)(1)(A) commencing at age 62 (for annuities beginning prior to age 62) or age 65 (for annuities beginning after age 65). Regulation §1.415(b)-1(b)(1)(i)(B) provides that, with respect to a benefit payable in a form other than a straight life annuity, the annual benefit is determined as the straight life annuity payable on the first day of each month that is actuarially equivalent to the benefit payable in such other form. Does a plan’s annuity frequency affect the calculation of the age-adjusted dollar limit in §415(b)(1)(A), or must the calculation be based on monthly factors regardless of the plan provisions?

RESPONSE

The calculation of the age-adjusted dollar limit is affected by the plan’s annuity frequency. The ageadjusted limit for a straight life annuity payable before age 62 or after age 65 is the actuarial equivalent of the dollar amount limit in §415(b)(1)(A) payable in the form of a straight life annuity commencing at age 62 (for annuities beginning prior to age 62) or age 65 (for annuities beginning after age 65) and payable at the same frequency. Thus, there would be different adjustment factors for annuities that were paid monthly and annually.