LS calc for retiree

[Cloudy]

Terminating traditional DB plan. Owners spouse age 75 has been receiving installment payments to satisfy RMD requirements but will now elect a lump sum. Election forms with spousal consent were completed at the time.

I feel good that this is a new ASD, all optional forms must be provided, a new spousal consent is required, and that using current 417(e) rates is correct.

To date she has received 6 annual installments out of an 18 year certain benefit.

Is the lump sum value:

1. The 417(e) value of the normal form accrued benefit reduced for payments received.

2. The 417(e) value of the remaining certain payments. Optional forms would be calculated from that value.

3. Something else.

We are having a debate in the office. I think it's #1.

[FAPInJax]

I would argue for what is behind Door #2. I would have to go back and research whether a certain only annuity is subject to the 417(e) rules though.

It would be no different than receiving a life annuity and only the present value of the future payments is the lump sum (you can ignore the prior payments - they are all the same). My opinion as to why the prior payments are ignored.

[Cloudy]

Thank you.

FYI - Installments are definitely subject to 417(e).

[david rigby]

I vote for option #2.

BTW, are there excess assets? If so, be careful what you do with them? If any amount is allocated to participant(s), don't forget about 415 limitation.

[AndyH]

Is it clear that the IRS will not prohibit this lump sum payment?

[Cloudy]

Andy,

Since the plan is terminating I don't think the IRS will have a problem with offering a LS to retirees. Have you had problems?

I realize there are other issues, such as with annuity pricing, but we don't anticipate that with this group.

[Effen]

I would also vote #2, but maybe #3.

I think I would determine the lump sum as the PV of the existing annuity payment using 417(e) rates, however, I would probably use plan AE to determine the other optional forms of payment.

[Mike Preston]

I'll go against the grain. The certain annuity was based on something. That "something" included recognition of 417(e) rates to the extent appropriate. You don't get a second bite of the 417(e) apple. The lump sum payable now is the commuted value of the remaining certain payments using whatever method was used to determine the first 6 years of payments.

No second ASD or, if there is, it is limited to conversions that make sense using that same "something".

But I'm tired and its late and I may just be cranky.

[AndyH]

Andy,

Since the plan is terminating I don't think the IRS will have a problem with offering a LS to retirees. Have you had problems?

I realize there are other issues, such as with annuity pricing, but we don't anticipate that with this group.

I was raising a question as to whether the IRS had indicated if any further restrictive regulations are to be forthcoming as a followup to Notice 2015-49 which hinted at future regulations. Second, I am wondering what the circumstances are that would cause a retiree (or is it a beneficiary?) to receive a period certain annuity and subsequently choose a lump sum and whether such circumstances raise any issues with spousal consent or the ASD rules.

[My 2 cents]

I'll go against the grain. The certain annuity was based on something. That "something" included recognition of 417(e) rates to the extent appropriate. You don't get a second bite of the 417(e) apple. The lump sum payable now is the commuted value of the remaining certain payments using whatever method was used to determine the first 6 years of payments.

No second ASD or, if there is, it is limited to conversions that make sense using that same "something".

But I'm tired and its late and I may just be cranky.

It would be my understanding that if one is to commute a series of payments, one would use the currently applicable 417(e) rates.