Lump sum due under cash balance plan - would it be greater of the acco

[Gary]

A person retires at age 65 with a cash balance account of 100,000. His equivalent annuity is 1,000 per month. If he chose a lump sum, it would appear to me that the lump sum would be the greater of 100,000 or the pv of 1,000 per month using 417(e)(at a minimum). Any comments out there?

[Guest Steve C]

The minimum lump sum must be no less than the PV of the annuity. I don't know of any qualification rules that would require the lump sum to be at least as great as the stated cash balance. There are, however, other good reasons to do so.

The most obvious may be employee relations. Paying out less than the cash balance will not engender warm and fuzzy feelings, especially after all the adverse press that cash balance plans have received.

I'm not an attorney, but I wonder whether a contractual issue may arise as well. If the cash balance plan is communicated in terms of the lump sum cash balance (like a defined contribution plan), does that give the participant a contractual right to that lump sum amount? I don't know.

[Guest]

You may want to read Notice 96-8, which contains many cash balance safe harbors as they relate to 411(d)(6) and 417(e).

In general, the answer to your question is yes, the 417(e) rates must apply to the accrued benefit (annuity @ RA). All of the conversion procedures should be spelled out in the document.