Lump sum - pv of immediate or deferred benefit?

[Gary]

A Plan allows an emplyee to receive his early retirement benefit in the form of a lump sum. The Plan says that the lump sum is the present value of his benefit. It does not use a defined term like Accrued Benefit, for example.

Do you think the lump sum s/b the present value of immediate benefit or present value of age 65 deferred benefit?

That is how much is open for interpretation and/or what is correct or most logical approach?

Gary

[Guest]

How does the plan define the early retirement benefit? Is it simply the actuarial equivalent of the accrued benefit at NRD? If so,then your two conditions result in the same answer. If the erb is the acc. ben at NRD reduced by some specific factors written into the plan,e.g. 1/2% per month,you should apply the reduction factors and value the immediate benefit.

[david rigby]

Caution!

I disagree with comment about "...result in the same answer." That depends on the plan definition(s) of actuarial equivalent. Many plans have one definition for purposes of optional forms and another definition (that is, GATT) for lump sum purposes.

Also, be careful about the second comment above. You may have to check two things: lump sum of the immediate reduced early benefit versus the lump sum of the deferred unreduced normal benefit. Probably take the greater.

[RCK]

My understanding is that a lump sum payment does not have to include the value of any Early Retirement subsidy. Our plan (covering 20,000 participants) has heavily subsidized ER factors, and the only lump sums are forceouts for less than $3,500. The lump sums are based on benefits at NRD, and deferred annuity factors.

This is all specified in the plan document. The answer to Gary's question would be dependant on the plan document. If it does not specify, I'd rely on precedent and amend to make that formal.

[Gary]

The Plan does provide an early ret subsidy. For example at age 55 the ERF is .5.

So looking at it from the perspective of the retiree, clearly, he would want to receive the pv of imm annuity. Plan is not explicit, other than to say the pv of his benefit.

How strong a case does employee have? I personally don't recall seeing plans value lump sums for those eligible for imm benefits as the pv of deferred benefit. Of course for a term vested, it is common for it to be the pv of deferred benefit.

gary

[Guest Doug Goelz]

I have always taken the approach that unless the plan's document has specific language that requires you to compare the PV(deferred AB) with the PV(ERB), you only have to provide the PV(deferred AB) for a lump sum distribution. The regulations do not require you to pay the greater of the two. They only require lump sums to be at least the present value of the deferred accrued benefit. This approach has been supported by almost every other actuary that I have discussed it with.

Unless there has been some sort of administrative practice to pay the greater of the two, if the document does not have specific language to require it, I would not do the extra calculation of the present value of the immediate early retirement benefit.

It sounds like your document is vague enough that you could argue it does not require the comparison.

[AndyH]

I think Doug's comments make perfect sense.

But, I wanted to add that you must watch 417(e) if you were going to use an immediate accrued benefit. There could be an 8% interest rate for early retirement, for example. Even 6% could be an issue now, depending upon the mortality table.

So, what I'm trying to say is that even if you used some type of immediate accrued benefit, you'd have to check it against the 417(e) deferred lump sum.

[IRC401]

The original post stated that the plan provided that an employee could receive his early retirement benefit in the form of a lump-sum. That standing alone sounds to me like he is entitled to the present value of the early retirement benefit, which would include the subsidy.

I question the relevance of the discussion as to what is required under the regs. The issue isn't how the plan could have been designed, but how it was designed. A decision not to provide the lump-sum equivalent of the early retirement benefit could open the trustees up to class action lawsuits and (at least theoretical) plan disqualification.

This is not an issue that should be decided by reference to these message boards.

[Guest Doug Goelz]

Without knowing exactly what the plan document in the original message post says, I think the additional posts where of value to the discussion. These are issues that should be given some thought for plans with early retirement provisions and lump sum payment features.

Andy's point is probably the most important. The PBGC has stated one of the errors it sees frequently on audit is that plans just pay the present value of the immediate early retirement benefit without regards to the present value of the deferred accrued benefit. If the PV(deferred AB) is greater than the PV(ERB), you must pay it as the lump sum amount.

[Guest Len Diorio]

The plan I am looking at calls for a lump sum that is the greater of the pv of the age 65 AB or the pv of reduced ERB, but in calculating pv of reduced ERB they are using an interest rate different from the GATT rate (a higher rate based on a twelve month average prior to early retirement) and a 1984 mortality table. Does section 417 require the use of

Gatt rate and '83 mortality table to calculate pv of ERB as well as value of AB? In my example, the pv of ERB is greater but would be even greater if they used GATT interest rate and longer life

expectancy.

[david rigby]

Probably not. GATT establishes a minimum. It sounds like your plan is using that as a minimum. As long as the alternative method is well-defined, available on a non-discriminatory basis, and is a unisex-type of calculation, it should be OK.

[Gary]

Len

What you describe seems uncommon, but also legal.

gary