415 and Multiple Annuity Starting Dates

[AndyH]

Simplified, exaggerated version of my question:

Participant starting collecting a pension in-service at age 62 for $150,000 per year which was his high 3 comp limit. Assume it equaled his 415 dollar limit and the high 3 comp never increased. Still working. Participant is now 99 years old, so he has collected $5.55 million. Plan is being terminated and is being amended to allow for a lump sum upon plan termination. How is the maximum lump sum that such participant may receive determined, i.e. how are the prior distributions "taken into account" in the calculation?

Current opinions appreciated since I'm not sure there is an official answer, or equally welcome are comments on how the IRS views this currently.

I have read David MacLennan's 2006 article on this subject, but I believe it pre-dated the final 415 regulation.

[Andy the Actuary]

Are you suggesting you may come up with a different answer from the following proposition: A participant retires at age 99 with an annual benefit of $150,000 which is also his HC3, how do you calculate the lump sum?

[AndyH]

Well simplified.

Yes, that is the argument being presented (not my view). I take it you think the answer is the same, that the prior distributions have no impact?

I think the lump sum should disregard the prior payments because they represented the pension from RA to AA, and have no affect on the pension, or the pv of same, from AA to death. Agree?

If so, how is that "taking into account" the prior payments as required by the 415 regulation.

[Andy the Actuary]

Please cite the section of the 415 regulation to which you are referring.

[tymesup]

Alex, what is "Reserved"?

[AndyH]

Multiple annuity starting dates (§1.415(b)-2)

Section 1.415(b)-2 of the proposed regulations set forth rules for computing the annual benefit under one or more defined benefit plans in the case of multiple annuity starting dates. Multiple annuity starting dates exist, for example, where benefit distributions to a participant have previously commenced under a plan that is aggregated for purposes of section 415 with a plan for which the participant receives current accruals. In addition, the multiple annuity starting date rules apply for purposes of determining the annual benefit of a participant where a new distribution election is effective during the current limitation year with respect to a distribution that previously commenced. The multiple annuity starting date rules also apply when benefit payments are increased, unless the benefit increase complies with one of the safe harbors provided in the regulations.

Numerous commentators raised concerns regarding these rules. Based on these comments, the IRS and the Treasury Department have determined that revisions to these rules are needed before these rules are adopted in final form. Accordingly, these regulations reserve a place for regulations regarding multiple annuity starting dates. The IRS and the Treasury Department are developing new proposed regulations regarding multiple annuity starting dates, and corresponding revisions to regulations under §1.401(a)(9)-6.

In the interim, §1.415(b)-1 of these regulations provides that if a participant has or will have distributions commencing at more than one annuity starting date, the limitations of section 415 must be satisfied as of each of the annuity starting dates, taking into account the benefits that have been or will be provided at all of the annuity starting dates. In determining the annual benefit of a participant as of a particular annuity starting date, the plan is required to actuarially adjust past and future distributions with respect to the benefit that commenced at the other annuity starting dates.

After re-reading the relevant sections of the regulation, I am now much more comfortable that no adjustment is required under the circumstances described in my question.

[My 2 cents]

_{Perhaps a reasonable interpretation of the intent of the regulations would hold that if a participant's benefit had commenced at age 62 (limited as necessary by Section 415) and now, at age 99, there is to be a new annuity starting date with the payment being made as a lump sum, you don't get to measure the 415 limit as though benefits were just starting now. That is, recognition of amounts already paid would limit the person's benefit being converted to a lump sum to the 415 dollar limit as determined when the person was 62 (or, if the plan called for cost of living increases in accordance with the 415 regulations, to the limit as increased for that purpose immediately prior to the new annuity starting date). Certainly, it would make no sense to do anything other than to calculate the lump sum based on the amount already being paid and current age and current 417(e) rates. Obviously, it would be entirely nonsensical to hold that the participant could change from their current payment form to a lump sum but that because of all the money already paid, 415 would limiit the lump sum to $0!}

[Andy the Actuary]

Andy, thank you.

The other Andy.

[AndyH]

Thank you both for you comments.

Alex