Lump sum distribution of pension - how to determine value - how it is taxed

I am considering early retirement and want to understand the implications of taking an optional lump sum distribution.

• One concern deals with calculation of the lump sum value.
  • How is the value of a lump sum pension distribution calculated?
  • What are “Minimum Present Value Segment Rates” and how are they used?
• Another concern deals with taxes owed on the lump sum.
  • How is a lump sum distribution of a pension taxed?
  • Can the lump sum distribution from a pension be rolled over to an IRA or even better, a Roth IRA?

For context, my current employer uses Fidelity to administer benefits.  I am eligible for early retirement.  I am married, so any lump sum requires documented spousal consent. I have two different pension plans as well as a 401(k), all with this same employer. I also have unrelated traditional and Roth IRAs that are outside of the company plans. One of the employer sponsored pension plans stopped receiving credits on December 31, 2004, and I have the option of receiving a lump sum distribution on that pension after leaving the job and prior to age 72, or I could decide to start receiving a stream of monthly payments at a chosen time in that same period.

Regarding calculation of the lump sum value:

Discussion with Fidelity regarding the value of the lump sum distribution leads me to think that a Present Value calculation is performed using [what Fidelity referred to as] 417(e) PPA interest rates with a four month lookback.  Presuming that this is about a Present Value calculation, the Discount Rate to be used in that calculation is needed. While I wait for whatever Fidelity will send via mail, I found the following.

• “PPA” seems to refer to the Pension Protection Act of 2006.
  • Going back to the original text of the Pension Protection Act of 2006 gives the impression that Section 417 must have been added after the original act became law.
  • That law appears to have been further adjusted by some combination of the SECURE Act, the American Rescue Plan, the Infrastructure Investment and Jobs Act, and perhaps SECURE 2.0.
• In sifting through this attempt to determine how to calculate the lump sum value,
  • “Pension Plan Funding Segment Rates” or “Segment Rates” come up.
  • “Minimum Present Value Segment Rates” also come up.
• The “Minimum Present Value Segment Rates” table from the IRS website provides monthly interest rate values for three segments.
  • Though I did not find it in plan documentation, nor on the IRS website (it could be there), I did find indications that
    • The First Segment is related to Year 0 through Year 5 of the period in which monthly payments could have been received rather than a lump sum.
    • The Second Segment applies to Year 6 through Year 20.
    • The Third Segment applies to Years > 20.
  • Is the lump sum value calculated as the sum of three present value calculations?
    • Lump Sum  = (Present Value of First Segment) + (Present Value of Second Segment) + (Present Value of Third Segment)
  • What number of periods should be used for the Third Segment?
    • Is that left for a retiree to guess?
  • What is the correct way of calculating the lump sum value?
• I believe there are other considerations
  • A stream of payments (or annuity) is considered low risk in that the payments are assumed to be made.
  • Inflation will reduce the value of a stream of payments over time.
  • Putting inflation aside, a long lived beneficiary will receive a greater benefit than a short lived beneficiary of the same or equivalent annuity.
  • However the lump sum discount rate is determined, a higher interest or discount rate will result in a lower lump sum.
  • Are the above correct?
  • Other than taxes, is there more to be considered?

Regarding taxes owed on a lump sum, how is that determined?

Do I have the option to roll over the lump sum into either a Traditional or a Roth IRA?