Interest owed on late DB lump sum payment?

[Guest Steve C.]

Assume a lump sum distribution amount is calculated for a DB distribution as of a certain date. There is a delay of two months before actually writing the check to pay the former participant. The participant claims she is owed two months worth of interest earnings on the lump sum value as of the valuation date. Can anyone tell me what statutes or regulations govern the requirement to add earning to a delayed distribution? Any court cases out there on this topic?

[david rigby]

Might be a problem with how the plan defines the lump sum actuarial equivalent. Such definition usually states that the amount is determined as of the date of payment. If the delay is significant (in the eye of the beholder), then it might mean the original amount is not valid under the definition.

Even if that is not an issue, then the determination of interest might be related to several factors, such as what precedent, what is the reason for the delay, etc.

Most plans sponsors I encounter do not have a problem with a reasonable interest adjustment whenever the payment is delayed. However, it is probably the decision of the sponsor, and should be applied consistently.

[MGB]

There is a regulation (I think under DOL), but I don't remember where, concerning "reasonable administrative delays," which clearly states that you do not have to adjust with interest. I think there is a reasonability standard in there of 90 days. That has been around for a long time.

Of course, I agree with the earlier post that the plan document language and/or precedent may bring on a different conclusion than the minimum required by law.

[Note: My memory of this may be because of the following statement implying that an administrative delay is considered to have been paid on the annuity starting date, I don't remember now. This is 1.401(a)-20, Q&A A-10(B): "Administrative delay. A payment shall not be considered to occur after the annuity starting date merely because actual payment is reasonably delayed for calculation of the benefit amount if all payments are actually made."]

However, we have a new proposed regulation a couple of months ago on "retroactive annuity starting dates." If the delay is due to the participant not providing the required J&S signature forms until after the annuity starting date, then you MUST adjust with "appropriate interest." That is undefined, but this proposed regulation is a part of 417, so it may be the 417(e) rates. However, it is also undefined as to how to apply it. For example, the policy reason for this clause is because retroactive annuity starting dates could be many years or decades (e.g., a lost participant is found). Could we interpret interest as an annual thing? In that case, anything under six months could possibly be rounded to zero?

This all seems backwards. If the administrator causes the delay, there is no interest. If the participant causes the delay, there is interest. Go figure.