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PPA and Lump sums

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Guest SVP

I concur with the lump sum calculation using the 3rd segment rate to discount payments in the 3rd segment back to the date of distribution and not applying the 2nd segment rate at all for payments in the 3rd segment.

I don't know about pre-retirement mortality. Interesting issue but all the plans I see have a pre-retirement mortality decrement (which will now be prescribed by the IRS) so I don't know how you could determine a lump sum under 417(e) without a pretirement mortality decrement.

Thoughts?

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You do not discount all the payments to the NRA at the applicable rate and then discount to payment date using the rate applicable to NRA, rather, in his example, you would discount the first twelve payments from expected payment date all the way to distribution date at the second segment rate and you would discount all the later payments from expected payment date to the distribution date at the third segment rate

In other words it is the PV as of the distrib date of a temporary life annuity for twelve months starting at age 65 using the second segment for all calcs plus

the PV as of the distrib date of a life annuity at age 66 using the third segment rate for all calcs

both of these PV's appear to require pre-retirement mortality

Thanks, that makes sense. (I'm not an EA, I just want to get a handle on how the new LS calculation will work.) I was starting to think the LS value would jump significantly when you went from age 45 to 45 + 1 month or age 60 to 60 + 1 month. Now I see that it doesn't.

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Tom, are you saying that the IRS has put it in writing somewhere that we have to use pre-retirement mortality when determining the 417(e) lump sum under PPA, effective 1/1/08, even if the actuarial equivalence in the document doesn't provide for pre-retirement mortality? If yes, are they saying that this is what should have been done pre-PPA? There sure aren't many people who have done it that way pre-PPA.

Holland Wickersham Pippins and probably others have all said at EA conferences that I attended that 417(e) includes a mortality discount pre-retirement, regardless of the plan's pre-retirement death benefit. They have also said that you didn't "have to" use mortality because using interest only would yield a higher result and the 417(e) result is a minimum. Of course that was before the reg relief for most valuable benefits only applied to increases required under 417e....I am checking the grey book to see if it is in writing and will see if there is a similar way to search ASPPA QA questions (ie Ask Larry Starr or Tom Poje)...

Its interesting that you refer to the plan doc rather than the death benefit. The rules compare the results of the 417(e) calc to the results of the plan rates, The fact that the plan has a zero "q" for all pre 65 ages in its actuarial equivalence shouldn't change its 417(e) result, to my knowledge. However if for 417 purposes the plan says that if the form of benefit is a form subject to 417 that the result will be no less than if the applicable mortality table and applicable interest rates replaced the interest and mortality table in the actuarial equiv section, then there is prolly an arguement that the plan requires the no-mortality 417(e) calc, but that woulfd be a plan requirement not a 417e requirement

Assume two plans identical except that plan 1 has actuarial equivalence of 5% interest; post ret mortality 1983 Iam; pre-ret mortality none

Plan 2 has a table of conversion factors for all forms at all possible ages based on the identical assumptions.... The 417(e) benefit for these two plans has to be the same....doesn't it???

The QA at ASPPA annual will address the most valuable question and, as a follow up, I will ask this specific question. Most of my small plans do not apply mortality in the 417(e) calc and are specifically written that way and I am concerned that they will (or do) have most valuable benefit issues.

Anyway to answer your questions...I'll try to find it in writing, but have heard them say it many times

Not a PPA issue...they've said it for years

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Guest SVP

Anybody heard anything about when the mortality table for 417(e) is coming out? We are in a position right now where lump sum benefits are to be calculated on sex distinct mortality. That can't be done!! But participants are well into the "red zone" for retirement elections and are supposed to be getting notices about their benefit amounts. But what are we supposed to be telling them about lump sums in 2008???

Can this situation continue much longer? We finally have interest rates but need the mortality table.

Does anyone think that congress can and will provide for an extension? Some say it's too late for them to act and Treasury can't extend the 1/1/08 effective date it on their own.

I can't be the only one out here on BL who is worrying about this am I?

Are there any fellow worriers who can share that they are concerned about this lack of guidence too?

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Tom, are you saying that the IRS has put it in writing somewhere that we have to use pre-retirement mortality when determining the 417(e) lump sum under PPA, effective 1/1/08, even if the actuarial equivalence in the document doesn't provide for pre-retirement mortality? If yes, are they saying that this is what should have been done pre-PPA? There sure aren't many people who have done it that way pre-PPA.

Holland Wickersham Pippins and probably others have all said at EA conferences that I attended that 417(e) includes a mortality discount pre-retirement, regardless of the plan's pre-retirement death benefit. They have also said that you didn't "have to" use mortality because using interest only would yield a higher result and the 417(e) result is a minimum. Of course that was before the reg relief for most valuable benefits only applied to increases required under 417e....I am checking the grey book to see if it is in writing and will see if there is a similar way to search ASPPA QA questions (ie Ask Larry Starr or Tom Poje)...

Its interesting that you refer to the plan doc rather than the death benefit. The rules compare the results of the 417(e) calc to the results of the plan rates, The fact that the plan has a zero "q" for all pre 65 ages in its actuarial equivalence shouldn't change its 417(e) result, to my knowledge. However if for 417 purposes the plan says that if the form of benefit is a form subject to 417 that the result will be no less than if the applicable mortality table and applicable interest rates replaced the interest and mortality table in the actuarial equiv section, then there is prolly an arguement that the plan requires the no-mortality 417(e) calc, but that woulfd be a plan requirement not a 417e requirement

Assume two plans identical except that plan 1 has actuarial equivalence of 5% interest; post ret mortality 1983 Iam; pre-ret mortality none

Plan 2 has a table of conversion factors for all forms at all possible ages based on the identical assumptions.... The 417(e) benefit for these two plans has to be the same....doesn't it???

The QA at ASPPA annual will address the most valuable question and, as a follow up, I will ask this specific question. Most of my small plans do not apply mortality in the 417(e) calc and are specifically written that way and I am concerned that they will (or do) have most valuable benefit issues.

Anyway to answer your questions...I'll try to find it in writing, but have heard them say it many times

Not a PPA issue...they've said it for years

Tom, what are you referring to by "the reg relief for most valuable benefits only applied to increases required under 417".

Are you referencing the (at least to me) elusive TAM of last year? Or something else?

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Tom, what are you referring to by "the reg relief for most valuable benefits only applied to increases required under 417".

Are you referencing the (at least to me) elusive TAM of last year? Or something else?

1.401(a)-20 Q&A 16

Q–16: Can a plan provide a benefit form more valuable than the QJSA and if a plan offers more than one annuity option satisfying the requirements of a QJSA, is spousal consent required when the participant chooses among the various forms?

A–16: In the case of an unmarried participant, the QJSA may be less valuable than other optional forms of benefit payable under the plan. In the case of a married participant, the QJSA must be at least as valuable as any other optional form of benefit payable under the plan at the same time. Thus, if a plan has two joint and survivor annuities that would satisfy the requirements for a QJSA, but one has a greater actuarial value than the other, the more valuable joint and survivor annuity is the QJSA. If there are two or more actuarially equivalent joint and survivor annuities that satisfy the requirements for a QJSA, the plan must designate which one is the QJSA and, therefore, the automatic form of benefit payment. A plan, however, may allow a participant to elect out of such a QJSA, without spousal consent, in favor of another actuarially equivalent joint and survivor annuity that satisfies the QJSA conditions. Such an election is not subject to the requirement that it be made within the 90-day period before the annuity starting date. For example, if a plan designates a joint and 100% survivor annuity as the QJSA and also offers an actuarially equivalent joint and 50% survivor annuity that would satisfy the requirements of a QJSA, the participant may elect the joint and 50% survivor annuity without spousal consent. The participant, however, does need spousal consent to elect a joint and survivor annuity that was not actuarially equivalent to the automatic QJSA. A plan does not fail to satisfy the requirements of this Q&A–16 merely because the amount payable under an optional form of benefit that is subject to the minimum present value requirement of section 417(e)(3) is calculated using the applicable interest rate (and, for periods when required, the applicable mortality table) under section 417(e)(3).

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Anybody heard anything about when the mortality table for 417(e) is coming out? We are in a position right now where lump sum benefits are to be calculated on sex distinct mortality. That can't be done!! But participants are well into the "red zone" for retirement elections and are supposed to be getting notices about their benefit amounts. But what are we supposed to be telling them about lump sums in 2008???

...

I think it was Norris and Manhart that brought us gender neutral mortality. Now that we have relative value disclosure, we are misleading participants by using neutral tables. I suppose it's even worse when we get spouses of the same gender for J&S benefits.

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was there guidance published on how to calculate the min. lump sum? I can't find it in all the piles of stuff i have around my cube

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Guest SVP

Guidence on the interest rate has come out in Notices 2007-81 and 82 and other than that all we have to go on is the law, the conference report and any discussions at meetings and conferences or here on Benefits Link.

We don't have the mortality table yet, we don't know if lookback and stability continue to apply and we don't have clarity on the tranistion period for phasing in the interest rate. A sentence in Notice 2007-81 has people questioning whether it's ambiguous wording or a change of thinking - it could be read that the PPA rates are to be blended with the applicable rate for 2007 which for many plans would be 30 year Treasury rate from 2006 and that's fixed for purposes of blending with the PPA rates during the transition. I don't happen to think that's what was intended and that's not what we were thinking of doing but the words could be read that way. So the guidence gives with one hand and takes away with the other!

And why are the rates preblended? It's pretty bacis math so was it intended to helpful or is there something else going on. For non-calendar year plans the preblended rates in the Notice won't work unless there is guidence coming that alters something. Sure the unblended rates are there but the blended rates are called ou in a box. We were thinking that the lookback month and stabilty period would continue to apply however, the way the notices are written where the rates that are called out in the box are the blended rates now we are wondering if the gov't is thinking something different.

It's not going to take much of a mortality improvement to make the lump sums under the PPA basis in 2008 bigger than the GATT/GAR basis. Is everyone prepared if the new minimum lump sum turns out to be bigger?

And what if the PPA lump sums are smaller but the plan continues to pay out the higher amount on the GATT/GAR basis - does the plan now have to grandfather that basis when adopting PPA?

What are people telling participants about the distributions in 2008? Can we tell them anything that is helpful?

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Guest mrsactuary
Guidence on the interest rate has come out in Notices 2007-81 and 82 and other than that all we have to go on is the law, the conference report and any discussions at meetings and conferences or here on Benefits Link.

We don't have the mortality table yet, we don't know if lookback and stability continue to apply and we don't have clarity on the tranistion period for phasing in the interest rate. A sentence in Notice 2007-81 has people questioning whether it's ambiguous wording or a change of thinking - it could be read that the PPA rates are to be blended with the applicable rate for 2007 which for many plans would be 30 year Treasury rate from 2006 and that's fixed for purposes of blending with the PPA rates during the transition. I don't happen to think that's what was intended and that's not what we were thinking of doing but the words could be read that way. So the guidence gives with one hand and takes away with the other!

And why are the rates preblended? It's pretty bacis math so was it intended to helpful or is there something else going on. For non-calendar year plans the preblended rates in the Notice won't work unless there is guidence coming that alters something. Sure the unblended rates are there but the blended rates are called ou in a box. We were thinking that the lookback month and stabilty period would continue to apply however, the way the notices are written where the rates that are called out in the box are the blended rates now we are wondering if the gov't is thinking something different.

It's not going to take much of a mortality improvement to make the lump sums under the PPA basis in 2008 bigger than the GATT/GAR basis. Is everyone prepared if the new minimum lump sum turns out to be bigger?

And what if the PPA lump sums are smaller but the plan continues to pay out the higher amount on the GATT/GAR basis - does the plan now have to grandfather that basis when adopting PPA?

What are people telling participants about the distributions in 2008? Can we tell them anything that is helpful?

Calculations that I did for January 2008 gave a lumpsum as per new PPA rules that is lower than the lump sum under old GATT rules- does the minimum GATT benefit have to be paid out? Or can we stick to PPA lump sum?

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Guest SVP

It's my understanding that the PPA basis can replace the prior GATT basis and that PPA has provided that you can you this without worrying about 411(d)(6) anti cutback rules. So to answer your question in general the PPA based l/s calc replaces the GATT based l/s calc. However the relief for anti cutback only applies if the basis before was GATT and the new basis is PPA - that is the change is from 417(e) to 417(e). If there are any minimums or something that makes the lump sum calc something other than on a 417(e) basis you can still swap out the GATT calc for the PPA calc just preserving whatever minimum you had before. That's they way I understand this to work.

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I think that what SVPdescribes is the minimum relief expected from the PPA/GATT change. The question remains, however, about whether the IRS will extend the relief further than that. In early October, your client requested a QJSA notice for a participant who retired and wanted to commence benefits in 2008. So, to fulfill the request, the lumpsum was calc'd based on GATT rates. If the plan changes from GATT to PPA, the lump sum will be less than the QJSA notice described. The employer wants to continue GATT lump sums for those who already got the notices and then switch to PPA.

Does this create a protected benefit because the employer retained GATT past the PPA effective date. Is there 411(d)(6) relief for that? Treasury has indicated there will be some transition relief, but hasnt described it.

Also switching from GATT to PPA reduces benefits. Does the plan have to have the amendment in place before it starts paying people under the PPA rates (unless the plan simply references 417(e))? This may be a serious issue, cuz even if the IRS says it wont disqualify your plan, it should be fun to explain to a judge how the plan paid a lower benefit than the written plan provides.

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