2022 or 2021 ?

[SSRRS]

Hi,

A Happy and Healthy New Year to all. Calendar year DB Plan uses December  as the look back for the 417e rates for lump sum calculations. A participant  requested on Nov 7  2022 his benefit, as he was retiring. Had the benefit been prepared anytime prior to 12 31 22 then the lump sum would have been calculated based on the 417e rates of December 2021. The December 2021 were quite low and thus, the lump sum would have been quite high. Although the sponsor was pushing in late December for the calculations to be completed, however it was not done until now in 2023. Question: The December 2022 rates are much higher and therefore the lump sum, calculated now in 2023, will be much lower. Do we give the participant the lower lump sum, or do we say, that since the participant requested his benefit in November 2022 and the sponsor really was pushing in late December 2022 for the benefits to be completed that the lump sum should be calculated as if it was done in 2022 based on the lower December 2021 417e rates and therefore give a higher lump sum? Thank you for any insights etc on this.

[Lou S.]

What was the reason for the delay? If the sponsor was pushing for it to be done in December, why didn't it get done? Was the participant late returning paperwork?

I don't think you can process it now using the 2021 417(e) rates as you would not be following the terms of the plan.

 

[SSRRS]

Lou S. thank you. Your knowledge and analytical  approach is always appreciated  1. The delay was due to the TPA not completing the final benefit calculations until 2023. If the participant announced he was retiring (at age 69) and  requested his benefit amounts back in in November 2022, when is the due date to give the employee his/her options , 30 days? 

[CuseFan]

The annuity starting date must be a date after the QJSA notice is provided (which required the benefit calculation) unless the plan allows retroactive annuity starting dates, which some do but I always exclude lump sums in such instance that I've seen.

I think you are stuck with the 2022 rates for 2023 lump sum unless the retiring employee in question was NHCE and the employer wants to amend the plan to increase this person's benefit.

[truphao]

While I totally agree with Lou, I think it is important to consider if the retiring person is an HCE or not.   If the person is not an HCE I would be OK (I think?) giving a larger lump sum to him/her on account of the admin delay.

[CuseFan]

The QJSA notice is provided 30-180 in advance of the ASD, although you can provide closer to the ASD if the person ultimately waives the 30 day notice to get payment ASAP.

If a claim for benefits was made, then the plan's claims procedures should be consulted for timing. Also, the TPA's service agreement should hopefully have some standards for this. 

This is not "administrative delay" in the context of the ASD and how the IRS interpret. I agree to can increase an NHCE retiree benefit without much issue but would do so via plan amendment.

[Lou S.]

I agree with CuseFan approach assuming this is an NHCE. Maybe a simple amendment that preserves the the 417(e) lump sum as of date of the request for participants who submit a request for payment in 2022 but is not processed until 2023 due to administrative delays beyond the participant's control.  Oddly specific but I would think it would cover this situation and make everyone happy. Might be a question about whether such an amendment might take your document out of prototype status but I think the IRS would be OK with it. Especially if the plan is "well funded" and the participant has always be an NHCE.

[SSRRS]

Thank you very much CuseFan, truphao, and Lou. Yes, as you mentioned  Lou, the plan is well overfunded by approximately 1.2 million, and this employee has always been an NHCE (55K salary range throughout his  career).

[SSRRS]

CuseFan Thank you for your insights. As you mentioned, the 30 day notice would have been for sure waived, as the participant wanted the money asap. Since reasonably, the participant should have received his options by mid December 2022 therefore technically the larger lump sum is owed to him (as if things were completed in the proper timely manner, the larger lump sum would have been used) and therefore, by giving the larger lump sum, we are giving the NHCE what is truly owed to him and money is NOT being improperly taken from the sponsor? Thank you 

[CuseFan]

It may be the RIGHT thing to do but I still think it must be via an amendment otherwise it may not be viewed by IRS as the LEGAL thing to do.

[Sellarsian]

FWIW at this point: the following is pasted from a past Q&A session between the actuarial "intersector" group and the IRS -- so not official guidance, but indicative of the IRS' view.

417(e) rates - lump sums and administrative delay: Assume lump sum due for Calendar Year plan is calculated and QJSA Notice sent to participant in November 2013 assuming an ASD of December 31, 2013. Plan has an annual stability period. Participant and spouse execute and return forms in December, but distribution is not made until January 15, 2014. Should distribution be based on 417(e) rates for 2013 or 2014? If 2014, must the QJSA notice be updated to reflect the benefits payable using those rates? What constitutes a reasonable administrative delay? Assume same facts, but that the election is not returned until January, followed by distribution, should it be based on 2013 or 2014 rates?

 IRS Response: The ASD determines the assumptions to be used. The statute says if the form is a LS distribution, the ASD is the date “all events have occurred which entitle the participant to such a benefit”, which would include return of signed forms. (This is not stated in the reg.) Thus if forms are signed and returned in December, and distribution is made in a reasonable period, 2013 assumptions should be used. If the forms are signed and returned in January, the ASD is in January and the 2014 rates must be used. Because the relative benefit amounts will have changed, new QJSA forms should be issued with the amounts based on 2014 rates. In this situation, it makes sense to clearly note on the election forms that the amounts shown on the form are only good if the forms are signed and returned by the end of the year. (“Reasonable administrative delay” is not going to be defined.)

[SSRRS]

2 hours ago, CuseFan said:

It may be the RIGHT thing to do but I still think it must be via an amendment otherwise it may not be viewed by IRS as the LEGAL thing to do.

Thanks, as usual you put it perfectly. 

[Jakyasar]

How would you write the amendment? As an 11-g or a general amendment specifying the terminated participant by job category or name. It may not be so clear cut, just thinking out loud and curious. This would be an amendment retroactive to 2022?

I do agree with the amendment should be prepared and should definitely be done as the participant may create a lot of headaches since there is a significant difference between 2021 and 2022 rates.

[Bri]

May a plan indicate that one particular employee gets his own definition of AE separate from everyone else's?  

I suppose another thought would be to increase the guy's benefit via -11g so that the 2023 lump sum of the new benefit equals the previously-calculated amount on the old benefit.  Then that could be an extra accrual for the guy which who knows, might help your testing.

[SSRRS]

2 hours ago, Jakyasar said:

How would you write the amendment? As an 11-g or a general amendment specifying the terminated participant by job category or name. It may not be so clear cut, just thinking out loud and curious. This would be an amendment retroactive to 2022?

I do agree with the amendment should be prepared and should definitely be done as the participant may create a lot of headaches since there is a significant difference between 2021 and 2022 rates.

Thank you Jakyasar and Bri. ..Jakyasar while I hear your point of the participant complaining due to the significant difference between the 2021 and 2022 rates., however, what was really bothering me is the following: If someone wants to the ethical and right thing and not take away money that realty should be due to someone-then it would seem that the right thing to do would be to work it out somehow (amendment etc.) to ensure that the larger lump sum is given (even if the participant does not realize the difference in the rates-just want to do the right thing)--Yet, on the other hand it is bothering me that maybe by giving the larger amount, this might be taking money from the sponsor, as maybe the sponsor would say that it could be that while the larger lump sum should have been given, however, we are now in 2023 and therefore the 2022 rates should be used and thus give a lower lump sum. Would it be advisable to give the sponsor a choice and ask him if he is ok with giving the larger lump sum or if he wants to use the lower amount- as this way we know for sure that we are not "harming" the sponsor in our attempt to do the right thing for the participant? Thank you ALL for any INSIGHTS ON THIS.

[CuseFan]

It is absolutely the employer/plan sponsor's decision on how to handle this. It is a discretionary decision (and discretionary 2023 amendment if done) to provide the retired participant with a lump sum that is more than what is otherwise statutorily required to be paid from the plan and impacts the funded status of the plan (and financial obligation of the employer), so in no way is this a decision that should be (or can be) made by anyone other than the employer. The employer's advisor(s) can provide advice concerning pros and cons and mechanics but the decision rests with the employer.

Going back to the TPA service agreement, if some agreed upon service standard was not met and directly resulted in this situation, then maybe some restitution is warranted - but that is between the employer and TPA.

[SSRRS]

CuseFan, thank you very much! And thank you ALL for all your insights and knowledge!

[Jakyasar]

Throwing in another question for a balance forward PS plan i.e. pooled account.

Same scenario above i.e. asked in November for a distribution based on 12/31/2021 balance (assume document is written this way).

No action taken by sponsor/TPA (assume the worst) to provide the paperwork and also distribute prior to 12/31/2022 despite the fact the participant asked for it.

If paid in 2022, 100k but now in 2023 dropped to 80k.

What do you do?

This is different than participant got the notice but did not return timely.

[Bri]

Ha, maybe hide behind the Plan Administrator's right to call for an interim valuation during 2022 anyway.  With such a large asset drop it might have been prudent to re-value the account balances ahead of a large distribution, such that the guy was only going to end up with 80k anyway.

[CuseFan]

A document should never allow a participant to elect a distribution based on a prior valuation date, that's just asking for this trouble. 

[SSRRS]

1 hour ago, CuseFan said:

A document should never allow a participant to elect a distribution based on a prior valuation date, that's just asking for this trouble. 

CuseFan, do you recommend the provision of using a special valuation date? Thank you.

[Bird]

20 hours ago, SSRRS said:

CuseFan, do you recommend the provision of using a special valuation date? Thank you.

Most* plans will allow for the Plan Administrator to declare a special valuation date, then it is up to them to decide if it is appropriate.

*Really "all" since this could be done by amendment even if not explicitly allowed in the document.

[CuseFan]

To address this issue, yes. 

[Jakyasar]

Yeah but many times have been done to accommodate HCE's and keys. This goes back a long time. Not a fan of plan administrator to declare a special val date.

But that's me.

[Bird]

16 hours ago, Jakyasar said:

Yeah but many times have been done to accommodate HCE's and keys. This goes back a long time. Not a fan of plan administrator to declare a special val date.

But that's me.

? What is the objection? If you have a plan with $1M in it, and one participant has $800K, and that participant asks for a distribution after the plan has lost 20% of its value since the last regular val date, are you not going to do a special val?

[Jakyasar]

It is not an objection, just not a fan, that's it. You did not specify if the special val was for an HCE or not. I have seen where the sponsors wanted to do a special val for HCEs only and this is where I have a problem but again, that is me. Just thinking out loud, nothing else.

[Bird]

2 hours ago, Jakyasar said:

It is not an objection, just not a fan, that's it. You did not specify if the special val was for an HCE or not. I have seen where the sponsors wanted to do a special val for HCEs only and this is where I have a problem but again, that is me. Just thinking out loud, nothing else.

I agree that if it is done to benefit an HCE (I guess that would be in the case of a market gain after the last val) it is problematic, but it's pretty much a requirement in many situations.