Lump sum payments after conversion to cash balance plan

[Guest nicktaldone]

On the eve of converting to a cash balance plan, a company sold a division. The division's employees were offered a lump sum payment calculated a present value from the period of the employee being 55 years old (as opposed to 65) to the mortality table age discounted back. This is the present value of an annuity. Then this lump sum was discounted back as a lump sum value to the employee's current age at the date the division was sold. So if the employee was 44 at time of sale and had a mortality table age of 80, the calculation involved taking the monthly numbers payable from the period of his reaching 55 years to age 80 for a value of about $250,000. Then this $250,000 was discounted back as a lump sum to age 44 for a lump sum of about $140,000. THE QUESTION IS WHETHER USE OF AGE 55 INSTEAD OF AGE 65 IS PROPER? Use of age 65 produces about $240,000 instead of the $140,000 this employee was offered.

[david rigby]

I'm very unsure of the substance of your question. some rewording might help.

However, you ask about whether the calculation of a lump sum was "proper". The determination of a lump sum actuarial equivalent should be based on a definition in the plan document itself. If the plan sponsor chose to provide an amount greater than the definition would provide, then it should be done by amendment to the plan, and should also be done on a non-discriminatory basis.

It appears that you believe the opposite happened: that the amount was less than as defined in the plan. There are certain circumstances under which that could happen. However, that does not involve discounting from a different age, as you imply.

In order to provide you more useful information, I think you will need to provide more details, including the definition of "actuarial equivalent" in the plan.

[Alonzo]

The benefit payable to the participant in a lump sum has got to be at least the actuarial equivalent of the benefit payable in the normal form at normal retirement age, calculted using the applicable interest rate (and the applicable mortality table if you've adopted GATT). See Reg 1.417(e)-1(d)(1). Note that any change to the normal retirement age that was a part of your cash balance conversion should be ignored because that part of the prior lump sum calculation method would be protected by 411(d)(6).

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[This message has been edited by Alonzo (edited 03-15-2000).]