AFTAP is less than 60%. Participant terminates and wants to commence taking a life annuity. When the AFTAP is certified above 60% can he then take 50% of the remaining PVAB as a lump sum and continue taking the other 50% as a life annuity? If the AFTAP is certified above 80% can he then take 100% of the remaining PVAB as a lump sum? Would there be a plan amendment required in order to allow these "splits" or a change in the form of payment?

Ultimately this is a plan design question, although at this point, most plans have not been amended to account for it.

Our position has been that if restrictions are in place the participant can either elect an immediate annuity, or defer their decision. If they elect the immediate annuity, then that cannot be changed at a later date. In other words, if < 60% they can have the annuity or defer. If they elect the annuity, it cannot be changed to a lump sum at a later date when the AFTAP increases. If AFTAP > 60%, but less than 80%, they can have an a) annuity, b) 1/2 annuity and 1/2 lump sum, c) 1/2 lump sum and defer election on other 1/2. If they take a or b, then they cannot convert that annuity at a later date to a lump sum. The only way they can have a lump sum at a later date is by deferring their election.

I acknowledge that others feel differently, however whatever you do it must be in the plan document. If the plan sponsor wants to let the participant have a 2nd bite at the apple, and your plan provided for that option, I think it would be ok. I just haven't been recommending it, primarily due to adverse selection and administrative complexities.

I think 2010 might produce some irritated participants due to rising 417(e) rates. Let’s say a participant wanted 1/2 lump sum and deferred the election on the other half. Now let’s say that the lump sum value of 1/2 of the AB is $10,000 in 2009. If the AFTAP increases so that the restrictions are lifted in 2010, and the 2nd half of the annuity is valued, it might only have a value of $9,500. That won't seem "fair" to a lot of participants. Nothing we can do about it, other than being ready with an explanation.