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PPA Lump Sum and 415 Limitations

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So, what do we do for 415 calculations from distribution and from valuation perspective?

Are we still using GAR94 mortality table and not a new 2008 lump sum mortality table (let’s call it PPA table) for 415 calculations?

So, for the distribution purposes it is lesser of present value of accrued benefit under PPA table and lump sum segment rates and present value of 415 max benefit under GAR94 and rate which is greater of 5.5% and lump sum segment rates. Am I correct so far? Would you compare each segment rate with 5.5%?

Now for the valuation purposes let’s assume person is age 55, retiring at 65, with assumption of taking lump sum upon retirement.

What combination of mortalities (GAR94/PPA) and interest rates (5.5%/val segment rates/lump sum segment rates) should we used?

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I think the new 415 regs make it clear that one uses the 417 table and not the old 415 table. So, it is simply 5.5% and the 417 table for 2008. I think.

I would not compare 5.5% to each segment. It is an overall evaluation.

Age 65 benefit limit times 5.5% factor/417 mortality (presumes a lesser lump sum than projected segment rates). Discounted to current age using appropriate segment rate (2nd segment for an individual 10 years from retirement age).

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Mike, I don't understand why you mixed the 5.5% post-retirement calculation with the segment rates.

My understanding is that you adjust the plan's benefit to a monthly annuity at the current age under three methods.

A - 5.5% with current 417 mortality

B - plan rates and mortality

C - plan's selected segment rate with current 417 mortality, times 100/105

Then you use the greater of B or C, but not greater than A as the 415 benefit.

You convert that benefit into a lump sum using the more valuable of plan rate or current 417 rules.

I don't see why you mix the rules of A & C.

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I guess I am confused by the last sentence of the following excerpt from Rev. Rul. 2007-67:

In addition, for plan years beginning on or after January 1, 2008, § 417(e)(3)(B) defines the term "applicable mortality table" as a mortality table, modified as appropriate by the Secretary, based on the mortality table specified for the plan year under subparagraph (A) of § 430(h)(3) (without regard to subparagraph © or (D) of such section). In contrast to the phase in of the use of the segment rates with regard to the applicable interest rate, there is no transition rule with regard to the applicable mortality table. In addition, PPA ’06 left unchanged the mortality table which generally must be used for the purposes of adjusting any benefit or limitation under § 415(b)(2)(B), ©, or (D).

Does the last sentence refer to GAR94 mortality table and what will it be used for?

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Bob, they are mixed only insofar as the calculation is being done in the valuation. It is January 1, 2010, and I'm doing the val for the 2010 plan year. The participant is 55 years old on the valuation date. How do you determine the present value, as of January 1, 2010 of the benefit expected to commence at 65? The post I was responding to said that the valuation assumption is that the benefit is paid in the form of a lump sum. So, we determine the lump sum and I "guessed" it would be the 415 limit. Then I discounted the expected single payment for 10 years, which uses the second segment rate.

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Does the last sentence refer to GAR94 mortality table and what will it be used for?

It does, and it refers to how benefits are adjusted for commencement either before 62 or after 65.

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Bob, they are mixed only insofar as the calculation is being done in the valuation. It is January 1, 2010, and I'm doing the val for the 2010 plan year. The participant is 55 years old on the valuation date. How do you determine the present value, as of January 1, 2010 of the benefit expected to commence at 65? The post I was responding to said that the valuation assumption is that the benefit is paid in the form of a lump sum. So, we determine the lump sum and I "guessed" it would be the 415 limit. Then I discounted the expected single payment for 10 years, which uses the second segment rate.

Makes sense, since you are discussing 430 issues, not 417(e) or current 415 compliance. My confusion.

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My understanding is that you adjust the plan's benefit to a monthly annuity at the current age under three methods.

A - 5.5% with current 417 mortality

B - plan rates and mortality

C - plan's selected segment rate with current 417 mortality, times 100/105

Then you use the greater of B or C, but not greater than A as the 415 benefit.

You convert that benefit into a lump sum using the more valuable of plan rate or current 417 rules.

So, if I understand you, a participant with a 15000 monthly benefit payable at 65 is looking for a lump sum at 55.

A Determine the benefit payable at 55 using 5.5% / 417 mortality (2008 Applicable table)

B Determine the benefit payable at 55 using plan assumptions

C Not quite sure what this step is????

There is not a single segment rate applicable - there are 2 in this case - second segment for 10 years from 65 to 75 and then the third segment thereafter.

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Does the last sentence refer to GAR94 mortality table and what will it be used for?

It does, and it refers to how benefits are adjusted for commencement either before 62 or after 65.

Thanks Mike!

I think the new 415 regs make it clear that one uses the 417 table and not the old 415 table. So, it is simply 5.5% and the 417 table for 2008. I think.

I would not compare 5.5% to each segment. It is an overall evaluation.

Age 65 benefit limit times 5.5% factor/417 mortality (presumes a lesser lump sum than projected segment rates). Discounted to current age using appropriate segment rate (2nd segment for an individual 10 years from retirement age).

I assume the valuation segment rates and not 417 segment rates are used for the discounting. Should we split the age 65 benefit limit times 5.5% factor/417 mortality into two pieces and discount one of them with 2nd segment rate and another one with 3rd segment rate? And if benefits paid in a form of lump sum are not limited by 415, we would value them as an annuity using 417 mortality table and valuation segment rates, correct?

Muchos gracias in advance!

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Does the last sentence refer to GAR94 mortality table and what will it be used for?

It does, and it refers to how benefits are adjusted for commencement either before 62 or after 65.

Thanks Mike!

I think the new 415 regs make it clear that one uses the 417 table and not the old 415 table. So, it is simply 5.5% and the 417 table for 2008. I think.

I would not compare 5.5% to each segment. It is an overall evaluation.

Age 65 benefit limit times 5.5% factor/417 mortality (presumes a lesser lump sum than projected segment rates). Discounted to current age using appropriate segment rate (2nd segment for an individual 10 years from retirement age).

I assume the valuation segment rates and not 417 segment rates are used for the discounting. Should we split the age 65 benefit limit times 5.5% factor/417 mortality into two pieces and discount one of them with 2nd segment rate and another one with 3rd segment rate? And if benefits paid in a form of lump sum are not limited by 415, we would value them as an annuity using 417 mortality table and valuation segment rates, correct?

Certainly use the valuation segments. Only split if you are contemplating actual disbursement at multiple dates. Your presumption was that there would be a single payment, so you would not do anything at the 3rd segment rate. I don't think it is clear what one uses to determine the lump sum if not limited by 415. Certainly if limited by 415 we use the 5.5% calculation in today's economic environment, since it will always be the smallest. But if circumstances change, we could end up using a different prong (say, the 105% prong). Understanding that is critical to understanding that if the benefit is not limited by 415 then we need to value the benefit that we think will be paid 10 years out. When I say that it isn't clear how to value it, I mean that there are no prescribed assumptions. JP Morgan makes an argument for insisting the current segment rate structure is not presumed still in place and instead the forward rates from the current rate structure are in place. Actually, they say that the proposed regs require it. I'm not so sure. Someday before 1/1/2009 I think I'll confirm it one way or the other. In any event, the proposed regs aren't effective until 1/1/2009, so for 2008 vals we can certainly make our own assumption as to what the segment rates will be on the date that the lump sum is paid. Using current segment rates (the equivalent to assuming that the segment rates will remain unchanged in the next 10 years) is certainly one option, notwithstanding the presumption that JP Morgan makes with respect to the proposed regulations. Choosing something completely different is an option, too.

The JP Morgan article can be found here:

http://www.jpmorgan.com/cm/Satellite?c=JPM...l_Page_Template

The quote that will get you to the area where they discuss this is:

"Under this approach, we implicitly assume that the yield curve at the time the lump sum is paid is based on the forward rates embedded in the current yield curve."

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