"Make-up" Distribution

[David]

A retired participant in a DB plan is entitled to receive a monthly life annuity in the amount of his 415 limit. He started receiving payments a couple of years ago, but the amount paid was only half of the correct amount. How does the plan sponsor make this right? Pay the shortfall brought forward with interest based on the plan actuarial eq. definition? If so, is there any 415 concern in the current year when distributing the 415 limit plus the "make-up" amount?

[david rigby]

Might be hasty to assume that the original amount was incorrect. Probably need a great deal more information about how the amount was determined. I doubt that the plan defines the benefit as "the 415 limit."

As for a "make-up", this actuary tries not to give legal advice, but it sure seems like the answer is "too bad".

Love to hear some other comments.

[David]

Thanks for your input, although I am surprised by your response, I would not have thought that the participant would have to lose out. You may well be right, I just did not consider that.

For clarity, the document does not define the benefit as "the 415 limit", it works out by the formula that his benefit at his benefit commencement date is restricted by the 415 limit.

Thank again.

[Guest]

I agree with PAX. It seems very strange that a benefit would be paid to someone at or near the 415 limit which was only 1/2 of the "correct amount". Generally, people at the 415 limit are very aware of their benefits and would not have accepted 1/2 of the benefit they thought they were going to get.

With that said, you may want to look in the APRSC/VCR rules to see how you are to handle corrective distributions. There may be an exemption of the 415 limits if its part of a corrective distribution.

[david rigby]

Are we talking about a 70-1/2 distribution?

Is the benefit payable as a monthly annuity?

[David]

It's not a 70.5 distribution and it is payable as a monthly annuity.

[david rigby]

Is it possible that the first payment was half of the maximum because it was 6 monthly payments instead of 12, retirement occurring in the middle of the year?

[David]

Unfortunately, that is not the case. The monthly amount distributed has been incorrect since benefit commencement a few years ago. The factor the benefit is off by is not exactly 1/2, I was using artistic license for simplicity. Seriously, the original benefit calculation appears to be incorrect. We have complete documents, salary history, etc. It looks like the original calc used incorrect salary history when comparing old val reports with W-2's.

[david rigby]

Hmm, as best I understand, you state that the amount was incorrect due entirely to mistaken calculation, arithmetic, etc. Not sure if that helps you, but it certainly points away from anyone trying to do anything that was a violation of the plan or the 415 rules. At least that part is good.

Might need to investigate the various procedures for plan correction(s).

Perhaps the plan sponsor's ERISA attorney should be included in that discussion.