Defining Optional Forms of Payment

This chapter provides overviews of optional forms of payment and optional forms of payment results, and discusses how to:

• Use optional forms of payment results.

• Create an optional forms of payment definition.

• Use form codes.

• Use payment types.

• Use QDRO with optional forms of payment.

Note. Optional forms of payment are also called “optional forms.” This book uses both terms.

Understanding Optional Forms of Payment

After you establish an employee’s normal form of payment benefit, you typically offer the employee a set of alternate payment options. The optional forms of payment function enables you to create a set of optional forms of payment from which an employee may choose.

Each optional form set is associated with a particular benefit. That is, you set up one optional forms of payment function result for each benefit formula and benefit commencement date combination. Typically, this means one optional forms of payment function result per benefit formula.

Note. Use a single benefit formula and benefit commencement date (BCD) for all optional forms of payment definitions within a single function result. The one exception is that an optional form set including a lump sum can use a different BCD for the lump sum from the one used for the rest of the forms in the set.

Understanding Optional Forms of Payment Results

Optional forms of payment results are an end product of a calculation; you pick up the results when you prepare to start making pension payments.

The system also uses optional forms of payment information when applying Section 415 limits. The 415 limits function, which applies Internal Revenue Code limits across multiple plans, uses the optional forms of payment results as the source of its benefit information. If the benefit must be limited, the 415 limits function adds the limited amounts to the optional forms of payment results.

Because you can set up multiple optional forms of payment function results for a single benefit, you always mark one form set in each qualified plan for use by the 415 limits function. Because 415 limits are based on the single life annuity (SLA) form, this form set must include an SLA regardless of whether you actually offer that form to employees.

Using Optional Forms of Payment Results

Optional forms of payment results include quite a bit of information. Each form set includes several forms, each of which has:

• Identifying information about the nature of the form.

• One or several associated payment types. For example, a joint and survivor form includes both retiree and beneficiary amounts, while a level income option includes one amount to use until the retiree’s social security retirement age and another amount to use after the retiree reaches social security retirement age.

• Four dollar amounts for each payment type:

  • Total amount before applying 415 limits.

  • Nontaxable portion of the pre-415 limits amount.

  • Total amount after applying 415 limits.

  • Nontaxable portion of the post-415 limits amount.

The following page (access this page under Pension, Review Calculations, Review Calculation Results) shows results for a single form in an optional form set:

• Each form is identified by the form type, the number of years of guaranteed payments, and the percentage of the benefit that is continued to a surviving beneficiary.

• Forms can have multiple payment options. A joint and survivor form includes payments for the retiree and beneficiary payments for after the retiree dies.

• The system provides four values for each payment option: the total amount and any nontaxable portion of that amount, both before and after applying 415 limits.

See Also

Using Form Codes

Using Payment Types

Viewing Optional Forms Results

Creating an Optional Forms of Payment Definition

To create a definition for an optional form of payment, use the Optional Forms (OPTIONAL_FORMS) component.

This section lists the pages used to create an optional forms of payment definition and discusses how to:

• Define the general parameters of an optional form set.

• Define forms.

• Set up lump sum parameters (part 1).

• Set up lump sum parameters (part 2).

• Enter information about level income option forms.

Pages Used to Create an Optional Forms of Payment Definition

Defining the General Parameters of an Optional Form Set

Access the General Parameters page.

Benefit Formula Name	Enter the name of the benefit formula function result. Each set of optional forms is linked to a single benefit formula.
Use Formset in 415 Processing	Select this option if the benefit is subject to 415 limits, and enter the name of your 415 limits rule. The 415 function applies Internal Revenue Code limits across plans, using results from optional forms processing as its benefit information source.
Bypass This Set If … Custom Statement is True	Select this option, and enter the custom statement with your criteria to bypass this set under certain conditions. For example, you can bypass a set of early retirement optional forms if the employee is not eligible for early retirement.

Definition Name

Each set of forms is based on a particular benefit commencement date. This date is important when determining actuarially equivalent payment forms.

Beneficiaries

If Plan Allows

If a single optional forms of payment function result contains multiple definitions, be sure that all the definitions:

• Use the same benefit formula name, employee optional form age, and beneficiary age.

• Are treated the same for 415 processing.

Normally, you calculate optional forms of payment as of different dates by running multiple calculations with different benefit commencement dates. However, you can also set up multiple optional forms of payment function results so that a single calculation produces optional forms of payment for multiple dates. For example, you could create one optional form of payment function result based on event date and another based on benefit commencement date.

Non-Taxable Amount Calculation

If an employee has been contributing after-tax money toward a pension, a portion of the final benefit is treated as nontaxable until the employee has recovered the after-tax contributions. For lump sum payments, this is the entire cost basis—that is, the accumulated value of all the employee’s after-tax contributions. For other forms of payments, the cost basis must be divided by a divisor to spread the cost basis over the expected number of monthly payments.

For example, a retiree with a cost basis of 2,600 USD and a divisor of 260 would recover the 2,600 USD over 260 monthly payments. This means that 10 USD of the retiree’s monthly benefit would be nontaxable for the first 260 months that the retiree was receiving benefits. After the 260 months, the retiree’s gross monthly pension benefit would still be the same, but all of it would be taxed.

The system determines whether the simplified method is applicable and generates a message when it is not.

When the simplified method is applicable, there are different rules for lump sums, certain only payments, and annuities.

For lump sum payments, all the nontaxable money is paid out at once. For example, Penelope’s total after-tax contributions (her cost basis) is 9,000 USD. If she takes a lump sum payment, the nontaxable portion is 9,000 USD.

For certain only payments, the divisor is the same as the number of guaranteed payments. So if Penelope were to choose a five year certain form of payment, she would receive her benefit over 60 monthly payments. Each month, 150 USD of her benefit (1/60 of her cost basis of 9,000 USD) would be considered nontaxable.

For annuity forms of payment, the divisor is based on the age (or ages) of the people receiving benefits:

• If the benefit is payable to the retiree only or a single beneficiary (because the retiree has died before the benefit commencement date), the divisor is based on that one person’s age.

• If the benefit is payable to the retiree and one or more beneficiaries, the divisor is based on the sum of the ages of the retiree and the youngest beneficiary.

• If the benefit is payable to multiple beneficiaries but not to the retiree (because the retiree dies before the benefit commencement date), the divisor is based on the sum of the ages of the oldest and youngest beneficiaries.

Note. Pension Administration handles a maximum of two beneficiaries: the spouse and a single non-spouse beneficiary.

When the divisor is based on a single person's life, the system finds the divisor based on the following table:

For example, assume that Penelope starts receiving benefits at age 63 and she has no beneficiaries. Applying her divisor of 260 to her cost basis of 9,000 USD, you find that 34.62 USD of her benefit is nontaxable for the first 260 payments.

When the divisor is based on multiple people's lives, the system finds the divisor based on the following table:

For example, assume that Penelope’s husband, Jordan, is her beneficiary. She starts receiving benefits when she is 63 and Jordan is 65. Their combined age of 128 gives a divisor of 310. When this is applied to her cost basis of 9,000 USD, 29.03 USD of the benefit is nontaxable for the first 310 payments. This amount is the same whether Penelope or Jordan is receiving the benefit.

Defining Forms

The Forms Definitions page contains a list of all optional forms within the set. Add as many forms as you need, including your normal form.

Access the Forms Definitions page.

Forms Definitions

See Using Form Codes.

Note. Each form must have a unique combination of values in the Form Code, Years Certain, and Pct Continued fields. Because lump sums never use a years certain or percent continued value, you can only create one lump sum form per form set.

Note. The table lookup, custom statement and constant methods produce an adjustment factor. They do not calculate the actual value of the form. The optional forms of payment calculation applies the factor to find the value.

Because a level income option has two values, it has a special method for applying the factor. The factor is applied to the social security amount, and the result is added to the normal benefit amount to determine the pre-SSRA value. The post-SSRA value is the pre-SSRA amount less the social security amount.

If you enter a value in the Pct Continued field for the level income option, the factor is still used as described to calculate the pre-SSRA amount, but the system uses its own algorithm (described with the LIO Parameters page) to calculate the post-SSRA amount and the survivor benefit.

See Entering Information About Level Income Option Forms.

Select any of these check boxes that apply to your definition:

The QJSA and Spousal Consent options are informational. The system does not check that the option is qualified, determine whether a form requires spousal consent, or check that spousal consent has been received before making payments.

Setting Up Lump Sum Parameters (Part 1)

Use the Lump Sum Parameters - 1 of 2 page to set alternative employee ages and apply any minimums, maximums, or small benefit cashout thresholds. Scroll through the forms you have created; the fields here are only available for lump sums.

Access the Lump Sum - 1 of 2 page.

Lump Sum Ages and Formulas

If you use an actuarial method to find the lump sum value, the system needs to know the date when the lump sum is payable. And although this documentation says that all forms in the set apply at the same date, lump sum forms present a possible exception.

You can enter a lump sum date override, typically based on the lump sum date entered into the calculation page when the calculation is run. For example, for small benefit cashouts, the lump sum is paid out upon termination rather than on a retirement date twenty years in the future.

Maximums and Minimums

Setting Up Lump Sum Parameters (Part 2)

Access the Lump Sum - 2 of 2 page.

Lump Sum Parameters

Select one of these options:

Entering Information About Level Income Option Forms

Access the LIO Parameters page.

Level Income Parameters

There is a system-delivered alias, SSRA_DT, that provides an employee's social security retirement date. To create a duration alias for the SSRA, use the employee’s birth date (the delivered BIRTH_DT alias) and SSRA_DT as the duration endpoints.

Understanding Level Income Option Survivor Benefits

The system calculates the value of n percent continued level income option as follows:

1. The level income option is calculated as if it were a single life LIO, disregarding the percent continued aspect. This calculation uses the method you specified in the form definitions: actuarial, table lookup, custom statement, constant, or user code.

2. The employee’s pre-SSRA amount is offset by the difference between a single life annuity and an n percent joint and survivor (J&S) benefit. The employee’s post-SSRA amount is the difference between this pre-SSRA amount and the social security benefit.

3. The beneficiary amount is n percent of the employee’s single life annuity benefit. There are no separate pre-SSRA and post-SSRA amounts for the beneficiary.

For example:

These figures are obtained through the following calculation steps:

1. Calculate employee’s LIO benefits without considering J&S component: Employee pre-SSRA = 1,750 USD. Employee post-SSRA = 750 USD.

2. Compare single life annuity to 50 percent J&S to find the dollar cost of the J&S: 1,000 USD - 900 USD = 100 USD.

3. Offset employee’s pre-SSRA benefit by the J&S reduction. The new pre-SSRA amount is: 1,750 USD - 100 USD = 1,650 USD. The new post-SSRA amount is calculated by subtracting the PIA amount from the new pre-SSRA amount: 1,650 USD - 1,000 USD = 650 USD.

4. Beneficiary amount = 50 percent times employee J&S benefit amount: 50 percent x 900 USD = 450 USD.

Note. In order to perform an n percent J&S LIO calculation, the optional form set must also include a single life annuity, an n percent J&S, and a single life LIO.

Using Form Codes

The form code indicates the form in which a pension is paid—for example, a certain only installment form or a joint and survivor annuity form.

The following table contains the form codes with their full names, the required options for each code, and a description of the form of payment that each code specifies.

The following notes pertain to the table above:

• The Options Necessary? column indicates whether the Years Certain and Pct Continued options are necessary (Y), not applicable (NA), or optional (O).

• Any time that you specify a number of years in the Years Certain field, any payments remaining after the participant dies are paid to the beneficiary.

• There is no separate form code for certain and continuous forms of payment. You create these forms by adding years certain criteria to other forms. Typically, you add years to a single life annuity, but you may also add years to a joint and survivor form or other forms.

Using Payment Types

Each form produces payment amounts for some combination of three people: the retiree, a spouse beneficiary, and a non-spouse beneficiary.

Retiree Payment Types

The following are the retiree payment types:

Beneficiary Payment Types

The following are the beneficiary payment types:

Matching Optional Forms of Payment to Payment Types

The following table shows the payment types produced by the various optional forms of payment:

There are different payment forms, depending on whether a beneficiary is a spouse. In the table above, the examples in the Two Beneficiaries column indicate that there is an automatic benefit paid to the spouse when the retiree dies, and another survivor benefit paid to a non-spouse when the retiree dies.

Using QDRO with Optional Forms of Payment

If your company intends to calculate QDRO benefits using Pension Administration, be sure your plan rules support these calculations. QDRO calculations typically start with a fixed benefit amount and only run these functions: early and late retirement factors, benefit formula, and optional forms of payment. Even if there are minimal optional forms available to QDRO alternate payees, you need to have optional forms of payment results available so that the payment process has access to the payment amounts.

Because QDRO alternate payees are not permitted to make a new spouse the beneficiary of a QDRO benefit, joint and survivor forms are generally not available to QDRO alternate payees unless the plan permits non-spouse beneficiaries.

Creating QDRO-Specific Definitions

If you offer limited optional form choices to alternate payees, you may need to use different definitions for the original employee and the alternate payee. You can handle this requirement through the system’s grouping capabilities. Your function result might look like this:

Using Aliases in QDRO Calculations

To perform calculations for QDRO alternate payees, a pension administrator first creates an employee ID (actually, a “non-employee” ID) for the alternate payee. This enables the administrator to run the QDRO calculation based on the alternate payee ID.

Important! Because the calculation is based on the QDRO payee’s ID, all aliases referencing employee data are resolved based on the QDRO payee data, not the original employee. It is important to keep this in mind as you set up your plan rules.

For example, the alias BIRTH_DT would produce the alternate payee’s date of birth, not the original employee’s date of birth. The alias SBIRTH_DT, which normally references the birth date of an employee’s spouse, is usually not valid for QDRO calculations, which typically do not incorporate any reference to a new spouse. If you want to reference the original employee’s birth date in a QDRO calculation, use the special alias QDRO_EE_BD (QDRO employee birth date).