Lump sum for late retiree owner

One participant plan,  71 year old owner with more than ten years of service and participation. NRA was 65. 3 yr avg pay is $280,000. Benefit is 100% of pay. Distribution will be made on 12/31/20.

Actuarial equivalence of $230,000 limit is about $371,000. Lump sum of $371,000 based on AMT at 5.5% is about $3.8 mm.

But maximum benefit is 100% of pay, or $280,000. Lump sum of 280,000 based on AMT at 5.5% is about $2.9 mm. Lump sum using 417 segment rates is about $3.5 mm.

What is the maximum lump sum for this participant? I’d like to say $3.5 mm, but I’m not convinced. This would not be an issue if 417 rates weren’t so low.

The lump sum will be $2.9m. In addition, note that the owner should have received a suspension of benefits notice, since somewhere around age 68 he would reach the 415 salary limit and his accrued benefit will not increase. And if he didn't receive the notice, you have a qualification issue. 

I was expecting that answer, but why doesn't 417 apply? 

Let's say his 3 yr avg pay is $252,000. LS based on AMT at 5.5% is now $2.6 mm. LS based on 417 is $3.2 mm.  Would you now say his LS is $2.6 mm, or is it $2.9 mm?

Because 415 trumps 417 in the lump sum benefit calculations.

In other words the lump sum is the greater of plan rate or 417 rate but not in excess of 415 limit.

I do understand that, Lou, but I was under the impression that it was greater of plan or 417 rate but not in excess of 415 dollar limit. That is, if we're using 100% of pay, we would still apply 417 as long as the 417 lump sum does not go above the dollar limit lump sum. And I've spoken with other actuaries who are under the same impression. 

"Let's say his 3 yr avg pay is $252,000. LS based on AMT at 5.5% is now $2.6 mm. LS based on 417 is $3.2 mm.  Would you now say his LS is $2.6 mm, or is it $2.9 mm?"

If I've been looking at it incorrectly, then in my second example, the LS would be $2.6 mm? 

Hi Bill,

2.6m is correct. Participant 415 max life annuity is the lesser of the dollar limit or comp limit. Maximum lump sum is based on the max life annuity. Participant would be limited to 2.6m in your second example. 

Also agree with Calavera about the suspension of benefits issue at age 68.5ish. The dollar limit exceeds the max comp limit (based on 401a17 limits) somewhere between 68-69, we try to hit that sweet spot with owners to get them the biggest LS possible before their max LS begins decreasing. 

Have a great weekend!

Thanks for the help, everyone!

BTW, note that the $230K limit will be unchanged for 2021 (ie, no help from indexing).