Lump Sum and 417(e)

Please forgive the very basic question, but in the case of a DB plan lump sum window, does the lump sum payment need to be the greater of the plan's actuarial equivalence factors and the 417(e) factors? If so, does this hold true in all circumstances and for all participants (i.e., after NRA, ER eligible, not ER eligible, etc.)? Thanks in advance. 

Statutorily, the 417(e) factors exist to be a minimum lump sum amount.  Many plans adopt them as the sole basis for lump sum determinations, but plans can use other actuarial equivalents if they wish.  Therefore, lump sums can be greater than those determined using 417(e) factors, but not less, except in the case of maximum benefits under Section 415.

Since you mentioned "window", if the plan has no stated actuarial equivalence for determining lump sums (because they never offered them), and they want to add a lump sum window, they do have some flexibility in choosing the Applicable Interest Rate within the 417(e) regulations.  The existing actuarial equivalence factors do not need to be used to determine lump sums unless the plan specifically states they apply for that purpose.  

Many thanks. As a follow up, does the annuity required to be offered along with the lump sum need to equal the greater of the plan's stated actuarial factors or 417(e) factors?

Or can the plan's actuarial factors be used to calculate the required annuity option even if it produces a lower benefit than the 417(e) factors would produce?

I am not really sure what you are asking, but I think you are asking about the immediate annuity that needs to be offered because the plan is now paying a lump sum? 

 The 417(e) lump sum needs to be the present value of the accrued benefit payable at NRD.  It is not required to include any early retirement subsidies.  However, the value of those subsidies needs to be disclosed in the relative value disclosures given to the participant with their election form.   You must at least offer an immediate QPSA and QOSA, and any other options they are eligible for at the time of lump sum payment. 

If the plan does not contain any early retirement provisions for ages below ERD, you will need to add them.  IOW, if the plan allows early retirement at 55/10, but the participant is 45, you need to know how to determine the immediate annuity at age 45.  Typically, we would use the standard early retirement factors until Early Retirement Age (if otherwise eligible), then use the plan's actuarial equivalents (not 417(e) for ages below that, but that should be part of the window amendment.  Then, for relative value disclosures you would compare the value of the immediate benefit using 417(e) factors to the value of the actual lump sum and disclose the difference to the participant.  You have lots of options with this, but that is the way we typically do it.  

I believe you could also determine the lump sum based on the annuity at NRD, then divide it by the immediate QPSA factor using 417(e) rates and offer that as the immediate annuity, but you need to be careful about those who might otherwise be eligible for early retirement and your participant disclosures would need to explain that if they waited until they were eligible for an early retirement benefit that their monthly benefit might be significantly higher.  We generally don't do it that way because of the inconsistencies, but if your plan doesn't have any early retirement provisions, that may be a simple solution.  No matter what you do, you need to follow plan provisions.

Thanks so much.