415 Limit Distributions to avoid impermissible forfeiture-taxation

[JAY21]

If a participant must receive payments at NRA to avoid an impermissible forfeiture of their benefit (say they are hitting the high-3 415 compensation limit) must these payments be considered "annuity payments" that are taxable -OR- can these payments be considered a partial lump sum eligible for rollover (non-taxable) status ? Thanks for any opinions.

[My 2 cents]

If a participant must receive payments at NRA to avoid an impermissible forfeiture of their benefit (say they are hitting the high-3 415 compensation limit) must these payments be considered "annuity payments" that are taxable -OR- can these payments be considered a partial lump sum eligible for rollover (non-taxable) status ? Thanks for any opinions.

In order to receive payments under the DB plan, is it not necessary for the participant to make a payment option election (with spousal consent if relevant)? If they elect annuity payments over a period of at least 10 years (or for a period of at least the participant's lifetime), then the monthly payments are unlikely to be eligible for rollover. Of course, it could depend if the plan somehow allows payments to start without a particular form of payment being elected, but if the arrangement is going to look like a regular series of periodic payments, it would probably not make them look eligible for rollover.

Based on my non-lawyer understanding, if the participant elected a full lump sum, the entire amount can be rolled over to an IRA without any current issues (unless the participant has reached 70 1/2).

[JAY21]

I guess I was trying to see if there was a way to take the first year 415 limit payment in a manner that would make it eligible for a lump sum rollover (client really doesn't want the taxable income) instead of taxable annuity payments, but by taking ONLY the amount that would be equal to the annuity amount. Probably can't have the best of all worlds here I suppose.

[Mike Preston]

Why not a regular lump sum that is then rolled?

[Calavera]

If a participant hits the high-3 415 compensation limit, delay in commencement will reduce the total lump sum amount. The best approach would be to take a full lump sum amount, and roll it to IRA. However the plan will need to be 110% funded on a post-distribution basis. So it is boiling down to questions: Is this a one person plan? Are we talking about owner or random HCE? How well plan is funded? If unfunded, does the owner plan to fully fund it before the plan termination? Is plan going to be terminated now or continue for a while? The options chosen would be based on the answer to all these questions. And options are:

a) start annuity payments (taxable)

b) full lump sum of total accrued benefits (could be rolled over to IRA)

c) give a suspension of benefit notice (if plan document allow for suspension). No payments will be required. In this case participant will lose some value of his benefits