Maximum lump sum for deferred retiree at 415 limit

[drakecohen]

One-participant plan with principal now at age 70.

Plan Normal Retirement Age: 62

High-consecutive 3-year average-pay at $150,000 and was accrued at NRA

Contributions were being made after NRA due to PPA higher limits on deductions and now the plan is overfunded by about 50% when valuing an annual benefit of $150,000.

Assuming an annuity factor of 10 at age 70 is the maximum lump sum that can be paid:

a) $1.5 million = $150,000 x 10

b) $2.7 million = $150,000 x 10 + $150,000 x 8 (8 years of missed payouts); or

c) around $2 million with the $150,000 annual benefit at NRA actuarially adjusted up though not above the 415(b) dollar limit

Thanks in advance for any responses and if answering either (b) or © can you provide a cite?

[Andy the Actuary]

Presumably, plan is terminating and we're looking a sole proprietor. Been awhile since I looked at 415 regs, but answer would appear to be (a) unless plan has retroactive annuity start date provision.

[Effen]

I agree with Andy that I think the answer is A. I have heard some people speak that B, or some form of B may be possible, but it seems to me you couldn't pay a retroactive benefit prior to a time when the provision existed in the document. C is just wrong - you cannot pay a benefit greater than 100% of comp, however, if the plan contained a COLA, you may be able to adjust the benefit post commencement, or something like that??

Also, I am not saying this is "your" problem, but we are seeing a lot of this kind of thing when we take over work, especially from TPA firms without an actuary. Personally, this is most likely just the result of bad consulting. Deductions are only valuable if they can get they can get the money out of the plan. I am sure he will take comfort in the amount he saved on admin fees while he stokes a 50% excise tax check to the IRS.

Consider raising compensation, or hiring additional employees - maybe spouse or children to absorb the excess.

[david rigby]

I wonder if there might be a plan violation: since no more could accrue (due to 415), and the EE was at least NRA, does the plan require commencement of the benefit? Whether annuity or otherwise?

[Calavera]

A plan violation would exist unless a plan sponsor gave a suspension of benefit notice to a plan participant (assuming the suspension of benefit notice language is in the plan document).

I am not sure if you can amend plan now for RASD and implement option b) from your original post. You need to consult ERISA attorney.

This is a perfect example of a bad consulting that may result in a lawsuit against TPA

[david rigby]

A plan violation would exist unless a plan sponsor gave a suspension of benefit notice to a plan participant (assuming the suspension of benefit notice language is in the plan document).

Correct. Cite is Reg. §1.415(a)-1(f)(7).

(My comment was based on the possibility that the plan might not have the suspension language.)

[AndyH]

How much service does he have and when did he start participating? The problem probably didn't start at least until he had 10 years of service and close to 10 years of participation.

[still learning]

I realize this is an old post, but I have a situation similar to drakecohen's. Andy, Effen, and Calavera, you're answers all address the lack of existing RASD provision, but what if the plan did allow RASD all along? Would you then say that b) is an acceptable solution to an overfunding problem? What about if the example were for a 71 year old who already took 2019 and 2020 RMD, does that change anything?

This was not my plan until this year, but let's assume we're fully in compliance in every other way, and just don't want to go over 415 limit with lump sum payment. And just as an editorial note, this is the type of client who didn't listen when assets were way down in March and April...if they had, I wouldn't be posting this.