FAQ 1023: 415 Maximum Lump Sum

Problem:

How is the 415 Maximum Lump Sum value calculated in the Participant Termination/Optional Forms program?


Solution:

First, the participant's 415 maximum annuity benefit is calculated, and then, the maximum lump sum factor on the participant's age in completed months is applied to that benefit. Both calculations are done as of the liquidation date.

The 415 maximum annuity benefit is the lesser of a) the maximum 415 dollar limit benefit, and b) the maximum 415 percent of pay limit.

The 415 maximum dollar limit benefit is the statutory benefit reduced from age 62 or increased from age 65 for participants younger than 62 or older than 65, and reduced for participants with less than 10 415 years of plan participation on the liquidation date.

Two calculations are done - one using plan actuarial equivalence factors, and one using 5% interest and applicable mortality factors. The 415 maximum dollar limit benefit is the lesser of the two.

The 415 maximum percent of pay limit is the participant's high 3-year average compensation on the liquidation date, reduced for less than 10 years of 415 years of service on the liquidation date.

The 415 maximum lump sum factor is then applied to the lesser of the two benefits to determine the maximum lump sum. This factor is based on the participant's age in completed months on the liquidation date and is the lesser of two factors - one using plan actuarial equivalence, and one using 5.5% and applicable mortality.

EXAMPLE:
PLAN:
NRA = 65
AEQ: 5.5%, RP20C U
415: 5%, RP20C U
415 Lump Sum: 5.5%, RP20C U

LIQUIDATION DATE = 12/31/2020
415 Maximum annuity benefit @age 62= 19,166.67

FACTORS:
AEQ: LA62- 153.832; LA36,10- 203.570
415: LA62- 161.307; LA36,10- 218.474
415 Lump Sum: LA 36, 10- 203.570

PARTICIPANT:
Age 36,10
415 service = 9 years
415 participation service = 3 years
High 3-year compensation average= 3,085.36
3,085.36 * 9/10= 2,776.82 415 % pay limit

19,166.67 * 3/10= 5,750
a) 5,750*153.832*1/1.055^(25+2/12)/203.570= 1,129.31
b) 5,750*161.307*1/1.05^(25+2/12)/218.474= 1,243.53
Lesser= 1,129.31 415 $ limit

MINIMUM(2,776.82, 1,129.31)= 1,129.31 415 maximum benefit on 12/31/2020

415 Maximum Lump Sum=
1,129.31 * MIN(203.570, 203.570)= 229,894