; FAQ 787: Funding to Lump Sum Limited by 415

FAQ 787: Funding to Lump Sum Limited by 415

Problem:

How are the PPA Funding Target and Target Normal Cost calculated when Funding to a Lump Sum Limited by 415?


Solution:

This feature is only available for PPA valuations. In general, when Fund to Lump Sum Limited by 415 (BENFORM screen) is set to Yes, a participant's 100% Lump Sums fields (VALPPA screen) are calculated as the minimum of Step 1 and Step 2. These steps can be modified by Plan Specification settings.

Step 1 - Funding to Lump Sum (Annuity Substitution); Maximum of a) and b):
a) Discounted AEQ LS
b) PPA Deferred LS

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan LS - Maximum of i.) and ii.)
i) Discounted 415 AEQ LS
ii) PPA 415 Deferred LS
b) Discounted Statutory 5.50% 415 LS
c) 105% PPA 415 Deferred LS

Participants included in calculations: Active participants, terminated participants with termination dates 12 months prior to the valuation date, and terminated vested participants with Annuity Normal Form Type set to 'A - Lump Sum' (ACCRBENF screen) for traditional DB plans.

Funding Target calculations will be based on benefits and 415 limits as of the beginning of the plan year. For EOY valuations, the BOY benefits can be the recalculated Begin of Yr Accrued Benefit instead of the Prior Accrued Benefit (both fields on ACCRBENF screen) if Use BOY accrued benefit for funding target (FUNDMETH screen) is set to Yes.

Target Normal Cost calculations will be based on performing the calculations based on benefits and 415 limits as of the end of the plan year and subtracting the calculated respective Funding Target. For BOY valuations, the EOY accrued benefits are on the LIABILTY screen. For either EOY or BOY valuation types, the benefits as of the valuation date are the Accrued Benefits on the ACCRBENF screen.

The PPA Max or Min Funding Target and Target Normal Costs will use the same method as selected in Plan Specifications except PPA Max Interest Rates, and PPA Min Interest Rates will respectively be used. When the various APRs are discounted, they are discounted by the 1st, 2nd, or 3rd PPA segment rate reflecting the participant's number of years until retirement.

Plan Specification Options for Step 1 and Step 2:
- Steps 1 and 2 can be modified to fit the plan's design, actuarial assumptions, and method by changing Plan Specifications.
- Select the Fund to Lump Sum Limited by 415 settings that are appropriate for the plan design.

Step 1 Options:
- Set Act Equiv rates equal 417(e) rates (417E screen) to Yes to replace Step 1 a) Discounted AEQ LS with PPA Deferred LS factor.
- For cash balance plans, set Disregard Prior Accrued Benefit (CASHBAL screen) to Yes to ignore Step 1 b) PPA Deferred LS. However, if Act Equiv rates equal 417(e) rates (417E screen) is set to Yes, the Discounted AEQ LS Step 1 a) will be replaced with PPA Deferred LS factor.

Step 2 Options:
- Set Act Equiv rates equal 417(e) rates (417E screen) to Yes to replace Step 2 a) i) Discounted AEQ LS with PPA Deferred LS factor.
- Set 417(e)(3) Applies to Lump Sums (MAXBNADJ screen) to No to ignore Step 2 a) ii)
- Set 105% 417(e)(3) Limit Applies (MAXBNADJ screen) to No to ignore Step 2 c).

For Step 2 - Limited by 415 Maximum Lump Sum, the APRs and PVFs used can be determined as of Age Last or age in Completed Months by selecting the respective setting in the Age Reduction Method (MAXBNADJ screen) field.

Below are four PPA minimum example calculations for reference. Table Maintenance \ Functions \ Calc Annuity Rates & Calc PV Factors can be used to calculate the APRs, PVFs and Ages.

Examples:
1. Normal form 5 year certain and life (5CC)
2. 417(e)(3) Applies to Lump Sums = Yes
3. Actuarial Equivalence = 417(e)
4. Cash Balance plan with 'Disregard Prior Accrued Benefit' = Yes

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Example 1 - Normal form 5 year certain and life (5CC)

Related Plan Specifications Settings:
Val date: 1/1/2022
Begin of Year Val: Yes
ID \ Cash Balance Plan: No
417E \ Act Equiv rates equal 417(e) rates: No
ACTEQUIV \
Post-Retirement Interest: 5%
Post-Retirement Mortality: RP22C U
MAXBNADJ \
Age Reduction Method: Age Last
Post-Retirement Mortality: RP22C U
417(e)(3) Applies to Lump Sums: No
105% 417(e)(3) Limit Applies: No
PPAFASMP \ PPA Minimum Segment Rates:
Segment 1: 4.75%
Segment 2: 5.18%
Segment 3: 5.92%

Participant Data
Age: 56
NRA: 62
NRA for 415 purposes: 62
Applicable Segment Rate: 5.18%
PPA Discount Factor: 1.0518^(56-62) = 0.73859

Step 1 Factors and Benefits
AEQ APR (5%, RP22C U, 62): 162.572
PPA PVF (4.75%, 5.18%, 5.92%, RP22C U, Age 56 deferred to 62): 112.476
ACCRBENF screen \ Accrued Benefit: 4,000.00
LIABILITY screen \ EOY Accrued Benefit: 6,000.00

Step 2 Factors and Benefits
AEQ APR (5%, RP22C U, 62): 162.572
MAX APR (5.50%, RP22C U, 62): 154.336

ACCRBENF screen \ BOY 415 Accrued Benefit: 4,083.33
LIABILITY screen \ EOY 415 Accrued Benefit: 6,125.00

Calculation of PPA Min Funding Target is the minimum of Steps 1 and 2:

Step 1 - Plan Funding to Lump Sum (Annuity Substitution) - Maximum of a) and b):
a) Discounted AEQ LS:
Accrued Benefit x AEQ APR x PPA Discount Factor
4,000.00 x 162.572 x 0.73859 = 480,296.21
b) PPA Deferred LS:
Accrued Benefit x PPA PVF
4,000.00 x 112.476 = 449,904.00
Maximum of a) and b): 480,296.21

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan's LS - Maximum of i) and ii)
i) Discounted 415 AEQ LS:
BOY 415 Accrued Benefit x AEQ APR x PPA Discount Factor
4,083.33 x 162.572 x 0.73859 = 490,301.98
ii) PPA 415 Deferred LS
BOY 415 Accrued Benefit x PPA 415 PVF
N/A because 417(e)(3) Applies to Lump Sums: No
b) Discounted Statutory 5.50% 415 LS
BOY 415 Accrued Benefit x MAX APR x PPA Discount Factor
4,083.33 x 154.336 x 0.73859 = 465,462.98
c) 105% PPA 415 Deferred LS
N/A because 105% 417(e)(3) Limit Applies: No
Minimum of a), b), and c): 465,462.98

PPA Funding Target: Minimum of Steps 1 and 2: 465,462.98

Calculation of PPA Min Target Normal Cost is the minimum of steps 1 and 2 based on benefits at EOY minus PPA Min Funding Target:

Step 1 - Funding to Lump Sum (Annuity Substitution) - Maximum of a) and b):
a) Discounted AEQ LS:
EOY Accrued Benefit x AEQ APR x PPA Discount Factor
6,000.00 x 162.572 x 0.73859 = 720,444.32
b) PPA Deferred LS:
EOY Accrued Benefit x PPA PVF
6,000.00 x 112.476 = 674,856.00
Maximum of a) and b): 720,444.32

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan's LS - Maximum of i) and ii)
i) Discounted 415 AEQ LS:
EOY 415 Accrued Benefit x AEQ APR x PPA Discount Factor
6,125.00 x 162.572 x 0.73859 = 735,453.58
ii) PPA 415 Deferred LS
EOY 415 Accrued Benefit x PPA 415 PVF
N/A because 417(e)(3) Applies to Lump Sums: No
b) Discounted Statutory 5.50% 415 LS
EOY 415 Accrued Benefit x MAX APR x PPA Discount Factor
6,125.00 x 154.336 x 0.73859 = 698,195.04
c) 105% PPA 415 Deferred LS
N/A because 105% 417(e)(3) Limit Applies: No
Minimum a), b), and c): 698,195.04

Minimum of Steps 1 and 2: 698,195.04

PPA Min Target Normal Cost is 698,195.04 minus PPA Funding Target:
698,195.04 - 465,462.98 = 232,732.06

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Example 2 - 417(e)(3) Applies to Lump Sums = Yes

Related Plan Specifications Settings:
Val date: 1/1/2022
Begin of Year Val: Yes
ID \ Cash Balance Plan: No
417E \ Act Equiv rates equal 417(e) rates: No
ACTEQUIV \
Post-Retirement Interest: 5%
Post-Retirement Mortality: GA2002U
MAXBNADJ \
Age Reduction Method: Age Last
Post-Retirement Mortality: RP22C U
417(e)(3) Applies to Lump Sums: Yes
105% 417(e)(3) Limit Applies: No
PPAFASMP \ PPA Minimum Segment Rates:
Segment 1: 4.75%
Segment 2: 5.18%
Segment 3: 5.92%

Participant Data
Age: 57
NRA: 62
NRA for 415 purposes: 62
Applicable Segment Rate: 5.18%
PPA Discount Factor: 1.0518^(57-62) = 0.77685

Step 1 Factors and Benefits
AEQ APR (5%, GA2002U, 62): 152.157
PPA PVF (4.75%, 5.18%, 5.92%, RP22C U, Age 57 deferred to 62): 118.415
ACCRBENF screen \ Accrued Benefit: 16,000.00
LIABILITY screen \ EOY Accrued Benefit: 18,000.00

Step 2 Factors and Benefits
AEQ APR (5%, GA2002U, 62): 152.157
MAX APR (5.50%, RP22C U, 62): 154.336
PPA 415 PVF (4.75%, 5.18%, 5.92%, RP22C U, Age 57 deferred to 62): 118.415
ACCRBENF screen \ BOY 415 Accrued Benefit: 16,333.32
LIABILITY screen \ EOY 415 Accrued Benefit: 18,374.99

Calculation of PPA Min Funding Target is the minimum of Steps 1 and 2:

Step 1 - Plan Funding to Lump Sum (Annuity Substitution) - Maximum of a) and b):
a) Discounted AEQ LS:
Accrued Benefit x AEQ APR x PPA Discount Factor
16,000.00 x 152.157 x 0.77685 = 1,891,250.65
b) PPA Deferred LS:
Accrued Benefit x PPA PVF
16,000.00 x 118.415 = 1,894,640.00
Maximum of a) and b): 1,894,640.00

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan's LS - Maximum of i) and ii)
i) Discounted 415 AEQ LS:
BOY 415 Accrued Benefit x AEQ APR x PPA Discount Factor
16,333.32 x 152.157 x 0.77685 = 1,930,650.13
ii) PPA 415 Deferred LS
BOY 415 Accrued Benefit x PPA 415 PVF
16,333.32 x 118.415 = 1,934,110.09
b) Discounted Statutory 5.50% 415 LS
BOY 415 Accrued Benefit x MAX APR x PPA Discount Factor
16,333.32 x 154.336 x 0.77685 = 1,958,298.45
c) 105% PPA 415 Deferred LS
N/A because 105% 417(e)(3) Limit Applies: No
Minimum of a), b), and c): 1,934,110.09

PPA Funding Target: Minimum of Steps 1 and 2: 1,894,640.00

Calculation of PPA Min Target Normal Cost is the minimum of steps 1 and 2 based on benefits at EOY minus PPA Min Funding Target:

Step 1 - Funding to Lump Sum (Annuity Substitution) - Maximum of a) and b):
a) Discounted AEQ LS:
EOY Accrued Benefit x AEQ APR x PPA Discount Factor
18,000.00 x 152.157 x 0.77685 = 2,127,656.98
b) PPA Deferred LS:
EOY Accrued Benefit x PPA PVF
18,000.00 x 118.415 = 2,131,470.00
Maximum of a) and b): 2,131,470.00

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan's LS - Maximum of i) and ii)
i) Discounted 415 AEQ LS:
EOY 415 Accrued Benefit x AEQ APR x PPA Discount Factor
18,374.99 x 152.157 x 0.77685 = 2,171,981.98
ii) PPA 415 Deferred LS
EOY 415 Accrued Benefit x PPA 415 PVF
18,374.99 x 118.415 = 2,175,874.44
b) Discounted Statutory 5.50% 415 LS
EOY 415 Accrued Benefit x MAX APR x PPA Discount Factor
18,374.99 x 154.336 x 0.77685 = 2,203,086.36
c) 105% PPA 415 Deferred LS
N/A because 105% 417(e)(3) Limit Applies: No
Minimum a), b), and c): 2,175,874.44

Minimum of Steps 1 and 2: 2,131,470.00

PPA Min Target Normal Cost is 2,131,470.00 minus PPA Funding Target:
2,131,470.00 - 1,894,640.00 = 236,830.00

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Example 3 - Actuarial Equivalence = 417(e)

Related Plan Specifications Settings:
Val date: 1/1/2022
Begin of Year Val: Yes
ID \ Cash Balance Plan: No
417E \ Act Equiv rates equal 417(e) rates: Yes
ACTEQUIV \
Post-Retirement Interest: 5%
Post-Retirement Mortality: GA2002U
MAXBNADJ \
Age Reduction Method: Age Last
Post-Retirement Mortality: RP22C U
417(e)(3) Applies to Lump Sums: No
105% 417(e)(3) Limit Applies: No
PPAFASMP \ PPA Minimum Segment Rates:
Segment 1: 4.75%
Segment 2: 5.18%
Segment 3: 5.92%

Participant Data
Age: 57
NRA: 62
NRA for 415 purposes: 62
Applicable Segment Rate: 5.18%
PPA Discount Factor: 1.0518^(57-62) = 0.77685

Step 1 Factors and Benefits
AEQ APR (5%, GA2002U, 62): 189.989
PPA PVF (4.75%, 5.18%, 5.92%, RP22C U, Age 57 deferred to 62): 118.565
ACCRBENF screen \ Accrued Benefit: 16,200.00
LIABILITY screen \ EOY Accrued Benefit: 18,000.00

Step 2 Factors and Benefits
AEQ 415 APR (5%, GA2002U, 62): 152.157
MAX APR (5.50%, RP22C U, 62): 153.732
PPA 415 PVF (4.75%, 5.18%, 5.92%, RP22C U, Age 57 deferred to 62): 118.565
ACCRBENF screen \ BOY 415 Accrued Benefit: 17,249.99
LIABILITY screen \ EOY 415 Accrued Benefit: 19,166.66

Calculation of PPA Min Funding Target is the minimum of Steps 1 and 2:

Step 1 - Plan Funding to Lump Sum (Annuity Substitution) - Maximum of a) and b):
a) Discounted AEQ LS:
Accrued Benefit x PPA PVF
16,200.00 x 118.565 = 1,920,753.00
Because Act Equiv rates equal 417(e) rates: Yes, the PPA PVF factor is used instead of discounted AEQ APR.
b) PPA Deferred LS:
Accrued Benefit x PPA PVF
16,200.00 x 118.565 = 1,920,753.00
Maximum of a) and b): 1,920,753.00

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan's LS - Maximum of i) and ii)
i) Discounted 415 AEQ LS:
BOY 415 Accrued Benefit x PPA 415 PVF
17,249.99 x 118.565 = 2,045,245.06
Because Act Equiv rates equal 417(e) rates: Yes, the PPA 415 PVF factor is used instead of discounted AEQ 415 APR.
ii) PPA 415 Deferred LS
BOY 415 Accrued Benefit x PPA 415 PVF
N/A because 417(e)(3) Applies to Lump Sums: No
b) Discounted Statutory 5.50% 415 LS
BOY 415 Accrued Benefit x MAX APR x PPA Discount Factor
17,249.99 x 153.732 x 0.77685 = 2,060,109.45
c) 105% PPA 415 Deferred LS
N/A because 105% 417(e)(3) Limit Applies: No
Minimum of a), b), and c): 2,045,245.06

PPA Funding Target: Minimum of Steps 1 and 2: 1,920,753.00

Calculation of PPA Min Target Normal Cost is the minimum of Steps 1 and 2 based on benefits at EOY minus PPA Min Funding Target:

Step 1 - Funding to Lump Sum (Annuity Substitution) - Maximum of a) and b):
a) Discounted AEQ LS:
EOY Accrued Benefit x PPA PVF
18,000.00 x 118.565 = 2,134,170.00
Because Act Equiv rates equal 417(e) rates: Yes, the PPA PVF factor is used instead of discounted AEQ APR.

b) PPA Deferred LS:
EOY Accrued Benefit x PPA PVF
18,000.00 x 118.565 = 2,134,170.00
Maximum of a) and b): 2,134,170.00

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan's LS - Maximum of i) and ii)
i) Discounted 415 AEQ LS:
EOY 415 Accrued Benefit x PPA 415 PVF
19,166.66 x 118.565 = 2,916,347.49
Because Act Equiv rates equal 417(e) rates: Yes, the PPA 415 PVF factor is used instead of discounted AEQ 415 APR.
ii) PPA 415 Deferred LS
EOY 415 Accrued Benefit x PPA 415 PVF
N/A because 417(e)(3) Applies to Lump Sums: No
b) Discounted Statutory 5.50% 415 LS
EOY 415 Accrued Benefit x MAX APR x PPA Discount Factor
19,166.66 x 153.732 x 0.77685 = 2,289,011.03
c) 105% PPA 415 Deferred LS
N/A because 105% 417(e)(3) Limit Applies: No
Minimum a), b), and c): 2,289,011.03

Minimum of Steps 1 and 2: 2,134,170.00

PPA Min Target Normal Cost is 2,134,170.00 minus PPA Funding Target:
2,134,170.00 - 1,920,753.00 = 213,417.00

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Example 4 - Cash Balance plan with 'Disregard Prior Accrued Benefit' = Yes

Related Plan Specifications Settings:
Val date: 12/31/2021
Begin of Year Val: No
ID \ Cash Balance Plan: Yes
FUNDMETH \ Use BOY accrued benefit for funding target: Yes
417E \ Act Equiv rates equal 417(e) rates: No
ACTEQUIV \
Post-Retirement Interest: 5%
Post-Retirement Mortality: RP21C U
MAXBNADJ \
Age Reduction Method: Completed Months
Post-Retirement Mortality: RP21C U
417(e)(3) Applies to Lump Sums: No
105% 417(e)(3) Limit Applies: No
PPAFASMP \ PPA Minimum Segment Rates:
Segment 1: 3.32%
Segment 2: 4.79%
Segment 3: 5.47%
CASHBAL \ Disregard Prior Accrued Benefit: Yes

Participant Data
Age: 69
NRA: 69
NRA for 415 purposes: 68y, 11m
Applicable Segment Rate: 3.32%
PPA Discount Factor: 1.0332^(69-69) = 1

Step 1 Factors and Benefits
AEQ APR (5%, RP21C U, 69): 136.223
PPA PVF (3.32%, 4.79%, 5.47%, RP21C U, Age 69 deferred to 69): 138.98
ACCRBENF screen \ Begin of Yr Accrued Benefit: 5,004.00
LIABILITY screen \ EOY Accrued Benefit: 6,692.41

Step 2 Factors and Benefits
AEQ APR (5%, RP21C U, 68y, 11m): 136.54
MAX APR (5.50%, RP21C U, 68y, 11m): 131.26

ACCRBENF screen \ BOY 415 Accrued Benefit: 5,130.37
LIABILITY screen \ EOY 415 Accrued Benefit: 7,695.56

Calculation of PPA Min Funding Target is the minimum of Steps 1 and 2:

Step 1 - Plan Funding to Lump Sum (Annuity Substitution) - Maximum of a) and b):
a) Discounted AEQ LS:
Begin of Yr Accrued Benefit x AEQ APR x PPA Discount Factor
5,004.00 x 136.223 x 1 = 681,659.89
b) PPA Deferred LS:
Begin of Yr Accrued Benefit x PPA PVF
N/A because Disregard Prior Accrued Benefit: Yes
Maximum of a) and b): 681,659.89

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan's LS - Maximum of i) and ii)
i) Discounted 415 AEQ LS:
BOY 415 Accrued Benefit x AEQ APR x PPA Discount Factor
5,130.37 x 136.54 x 1 = 700,500.72
ii) PPA 415 Deferred LS
BOY 415 Accrued Benefit x PPA 415 PVF
N/A because 417(e)(3) Applies to Lump Sums: No
b) Discounted Statutory 5.50% 415 LS
BOY 415 Accrued Benefit x MAX APR x PPA Discount Factor
5,130.37 x 131.26 x 1 = 673,412.37
c) 105% PPA 415 Deferred LS
N/A because 105% 417(e)(3) Limit Applies: No
Minimum of a), b), and c): 673,412.37

PPA Funding Target: Minimum of Steps 1 and 2: 673,412.37

Calculation of PPA Min Target Normal Cost is the minimum of steps 1 and 2 based on benefits at EOY minus PPA Min Funding Target:

Step 1 - Funding to Lump Sum (Annuity Substitution) - Maximum of a) and b):
a) Discounted AEQ LS:
EOY Accrued Benefit x AEQ APR x PPA Discount Factor
6,692.41 x 136.223 x 1 = 911,660.17
b) PPA Deferred LS:
EOY Accrued Benefit x PPA PVF
N/A because Disregard Prior Accrued Benefit: Yes
Maximum of a) and b): 911,660.17

Step 2 - Limited by 415 Maximum Lump Sum; Minimum of a), b), and c)
a) Discounted 415 Plan's LS - Maximum of i) and ii)
i) Discounted 415 AEQ LS:
EOY 415 Accrued Benefit x AEQ APR x PPA Discount Factor
7,695.56 x 136.54 x 1 = 1,050,751.76
ii) PPA 415 Deferred LS
EOY 415 Accrued Benefit x PPA 415 PVF
N/A because 417(e)(3) Applies to Lump Sums: No
b) Discounted Statutory 5.50% 415 LS
EOY 415 Accrued Benefit x MAX APR x PPA Discount Factor
7,695.56 x 131.26 x 1 = 1,010,119.21
c) 105% PPA 415 Deferred LS
N/A because 105% 417(e)(3) Limit Applies: No
Minimum a), b), and c): 1,010,119.21

Minimum of Steps 1 and 2: 911,660.17

PPA Min Target Normal Cost is 911,660.17 minus PPA Funding Target:
911,660.17 - 673,412.37 = 238,247.80