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Plan Termination -- If adding a lump sum option for participants not in pay status may a different lookback month be used?


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Plan sponsor will terminate its pension plan in a standard termination. The plan currently has no lump sum distribution option, other than forced cash-outs for small benefits under $1,000, and other cash-outs (e.g., to an IRA) between $1,000 and $5,000.

The sponsor wants to add a lump sum distribution option for participants who are not in benefit payment status, to be used in connection with the standard termination. So far, so good.

The sponsor, however, wants to specify a lookback month for determining the applicable interest rate to be used in determining the lump sums under the new distribution option that is different than the lookback month used for determining small benefit cash-outs.

Is this do-able? Or, does it violate the 417(e)/411(d)(6) rules? Specifically, does it run afoul of the regulations at 1.417(e)-1(d)(4), which provides in relevant part: "The time and method for determining the applicable interest rate for participant's distribution must be determined in a consistent manner that is applied uniformly to all participants in the plan."

Would it be OK to get by this issue by "protecting" the participants with small benefits by giving them the benefit of the greater of lump sums determined under the two interest rates. (Everyone else will have a lump sum calculated under the new interest rate.)

Thanks!

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I think a question like this came up at the "Dialogue with the IRS" session at this week's Enrolled Actuaries Meeting. My recollection is that the plan cannot do what is suggested here. There can only be one basis for actuarial equivalence with respect to the requirements of 417(e).

Think of it this way - whether there was any expectation of having the plan's definition of actuarial equivalence apply outside of the context of small cashouts, the fact is that the plan did have a definition of actuarial equivalence (which, one presumes, specified the basis for equivalence determinations for payment forms subject to 417(e), including the lookback and stability parameters). To make any changes in that definition would have to be treated as creating grandfathered rights for all circumstances under which the actuarial equivalence provisions with respect to 417(e) would be applicable.

Don't forget that the actual distributions might not take place until one is in a different plan year, which would undermine any sort of effort to game the determination of lump sums by choosing a lookback period with the highest possible rates.

Would the lump sum lookback period be chosen in order to provide larger lump sums for everyone? It would be abusive to look for ways to save money on the backs of people choosing to receive lump sums. If the choice of lookback period is being made based on illegitimate motives like that, it would serve the sponsor right if everyone got the idea that the sponsor is trying to cheat them, leading to people choosing to force the sponsor to pay for lots and lots of insurance company annuities.

Always check with your actuary first!

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A bit harsh in that last paragraph, if you ask me. I think the consensus opinion is that different assumptions are not allowed, but if they were, I see nothing wrong with the plan sponsor making a choice that it perceives is in its best interest. That might very well lead to lower lump sums. If it is legal, it can hardly be described as abusive. And, yes, if the lump sums are significantly reduced the logical consequence may very well be more annuity purchases. Perhaps the goal isn't to reduce costs but to encourage lifetime benefits.

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I wasn't aware of the consensus opinion that different assumptions are not permitted. We have prepared several lump sum windows where different assumptions were used. None of the plan's have been audited, but we had fairly strong ERISA counsel in each who were ok with it.

We also did it many years ago in the plan termination situation, that was audited by the PBGC and they specifically looked at this issue and determined it was ok.

If there was no lump sum provision for participants over $5,000/$1,000, then I don't see how the IRS can argue you can't have a different basis for lump sums. As long as it isn't discriminatory, I don't see any problem with it.

I guess I am saying, we have done it many times and have never had a problem, but if the IRS is saying something different from the podium, you may need to at least consider what they are saying.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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  • 2 weeks later...

Its interesting that under $5000 lump sums are NOT 411(d)(6) protected and can be removed at any time. They can then be put back later with any look back permitted... so I find the IRS position curious but they have said it at ASPPA conferences too

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Surprised at results. Consistent with Effen, have see tis several times. If IRS Is adamant, it might be helpful if they put their words into print.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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