Minimum under 417(e) in 2008

[John Feldt ERPA CPC QPA]

http://benefitslink.com/boards/index.php?s...971&hl=GATT

The above discussion ended before the year-end new plan document setup rush, so I am wondering if any new insight is out there...?

Recap:

Ongoing DB plan defines the plan's interest rate and mortality as the GATT applicable rate and mortality. Assume the plan is not restricted (it's not under the 80% threshold). The plan requires the Section 417 interest rates for the minimum and the applicable mortality (commissioner's standard table). The applicable interest rate is the 30-year Treasury securities as specified by the Commissioner.

In the 2008 plan year, if the plan is not yet amended for the 417 change from PPA, must the plan compare the lump sum determined by using the old GATT mortality and full 30-year treasury interest rates (the existing terms of the plan), to the lump sum determined from the new required 417(e) blended rates and its new mortality?

Or can we just switch immediately in the 2008 plan year to just use the new blended rates and mortality with any 411(d)(6) worry, even if no amendment is in place describing these new rates and mortality?

I'd like to just start using the new stuff since the PPA required no amendment until 2009, but...

[FAPInJax]

My understanding is that you just go to the new method and do not have to grandfather the prior minimum.

[ak2ary]

I do not see where Rev Rul 2007-67 says that you do not have to amend the plan to use PPA rates. It gives relief under 411(d)(6) if you do amend...It says that if your plan incorporates the 417e rate by referenec that you do not have to amend. But I've seen alot of plans that say the Applicable interest rate is the rate on 30 year treasuries as published by the commissioner. Well the commissioner still publishes that rate. In that case I would be concerned that I am not following the plan document and you would have to pay the greater of PPA and GATT. Amend the plan ...besides imagine explaining in court, when the participant sues, how your calc was for less than what the plan doc says

[John Feldt ERPA CPC QPA]

Thanks, Tom. That was exactly my concern when reading 2007-67. At every corner, it talked about an amendment to adopt the PPA rates.

Since we are preparing to send out the Final 415 regs amendment with the PFEA amendment, I think we'll go ahead and include the PPA lump sum amendment as well.

[Guest KennyH]

I do not see where Rev Rul 2007-67 says that you do not have to amend the plan to use PPA rates. It gives relief under 411(d)(6) if you do amend...It says that if your plan incorporates the 417e rate by referenec that you do not have to amend. But I've seen alot of plans that say the Applicable interest rate is the rate on 30 year treasuries as published by the commissioner. Well the commissioner still publishes that rate. In that case I would be concerned that I am not following the plan document and you would have to pay the greater of PPA and GATT. Amend the plan ...besides imagine explaining in court, when the participant sues, how your calc was for less than what the plan doc says

You might have to amend the plan, but what prevents you from changing your administrative practice immediately to conform to using PPA rates while retroactively amending the plan in 2009?

[ak2ary]

Administrative practice is not a plan provision...you an generally have an administrative practice that brings the plan into compliiance with the law and amend later, even if that increase participant benefits...you cannot have an administrative practice that decreases plan benefits below those contained in the document however

For most 2008 lump sums amending to PPA rates isnt necessary, its optional. You can simply pay the benefit contained in the plan doc and since the plan doc provides GATT the lump sum you pay will (in most cases) exceed the minimum required under 417e. The amendment is only necessary when you want to eliminate the GATT Rate

Since the removing GATT rates part of amendment is optional , you have to adopt it to make it effective..........

[ak2ary]

...of course not removing GATT rates may cause most valuable issues etc...

[ak2ary]

Let me take back oh say maybe 95% of everything I said in this thread. After a closer reading of 2007-67, and chasing down the references therein, I now believe that it does provide that you may retroactively remove GATT rates up until the end of the remedial amendment period all the way back to the first 2008 ASD, without jeopardizing the plan's qualified status.

You may not change lookback months or stability periods without providing the one year greater of period

You still run the risk of losing participant suits in court

So while amending in advance may be a best practice, you are probably ok to just take out GATT interest and Mortality and put in PPA interest and mortality operationally

[John Feldt ERPA CPC QPA]

Thanks Tom.

Then we'll 'probably' continue pay the greater of each until we have the PPA amendment adopted later (this spring), just to stay of the conservative side.

[Guest KennyH]

From the same thread

What about plans that incorporate 417(e) applicable interest and mortality by reference in the plan and use it as the actuarial equivalence basis for all conversions - not just lumps sums but also the QJSA and 10 C&C for instance???

It would appear that under PPA that 417(e) forms (i.e. lump sums) have relief from anti-cutback under 411(d)(6). But what about the QJSA and 10C&C? Can or should those conversion factors be determined on the PPA basis for app int and mort?

Technically the plan's definition of AE is applicable interest and mortality under 417(e) which the gov't has now changed. Basically the gov't changes the basis used for app int and mort and the plan says app int and mort for all AE so would you think it is appropriate to move to that new basis for all optional forms without grandfathering?

I would think that this would be risky but it's happening in part driven by the relative value regs with some reliance on Notice 96-8 for cash balance plan payments.

Does anyone have any opinion on this? I just picked up a client that has plan AE directly referencing Applicable Interest and Mortality. Were plans with this situation changing AE each year when the Applicable Interest rate changed? If so, would this be considered a similar situation?

[Mike Preston]

From the same thread

What about plans that incorporate 417(e) applicable interest and mortality by reference in the plan and use it as the actuarial equivalence basis for all conversions - not just lumps sums but also the QJSA and 10 C&C for instance???

It would appear that under PPA that 417(e) forms (i.e. lump sums) have relief from anti-cutback under 411(d)(6). But what about the QJSA and 10C&C? Can or should those conversion factors be determined on the PPA basis for app int and mort?

Technically the plan's definition of AE is applicable interest and mortality under 417(e) which the gov't has now changed. Basically the gov't changes the basis used for app int and mort and the plan says app int and mort for all AE so would you think it is appropriate to move to that new basis for all optional forms without grandfathering?

I would think that this would be risky but it's happening in part driven by the relative value regs with some reliance on Notice 96-8 for cash balance plan payments.

Does anyone have any opinion on this? I just picked up a client that has plan AE directly referencing Applicable Interest and Mortality. Were plans with this situation changing AE each year when the Applicable Interest rate changed? If so, would this be considered a similar situation?

In the case of AE provisions which morph per pre-existing plan document provisions, there is no need for 411(d)(6) protection. Yes, the actuarial equivalence changes per the terms of the plan document and it is a two edged sword. The benefits/conversions can increase/decrease per the pre-existing terms of the plan without it being considered a violation of 411(d)(6).

Having spent quite a bit of time recently analyzing the 417(e) rates and what uses they are/can be/ put to, I'm fairly comfortable relying on pre-PPA document provisions that incorporate automatic changes as being exempt from 411(d)(6) concerns. Of course, one should confirm same with an ERISA attorney if they have a specific case that needs this.

[KimberlyC]

From the same thread

What about plans that incorporate 417(e) applicable interest and mortality by reference in the plan and use it as the actuarial equivalence basis for all conversions - not just lumps sums but also the QJSA and 10 C&C for instance???

It would appear that under PPA that 417(e) forms (i.e. lump sums) have relief from anti-cutback under 411(d)(6). But what about the QJSA and 10C&C? Can or should those conversion factors be determined on the PPA basis for app int and mort?

Technically the plan's definition of AE is applicable interest and mortality under 417(e) which the gov't has now changed. Basically the gov't changes the basis used for app int and mort and the plan says app int and mort for all AE so would you think it is appropriate to move to that new basis for all optional forms without grandfathering?

I would think that this would be risky but it's happening in part driven by the relative value regs with some reliance on Notice 96-8 for cash balance plan payments.

Does anyone have any opinion on this? I just picked up a client that has plan AE directly referencing Applicable Interest and Mortality. Were plans with this situation changing AE each year when the Applicable Interest rate changed? If so, would this be considered a similar situation?

In the case of AE provisions which morph per pre-existing plan document provisions, there is no need for 411(d)(6) protection. Yes, the actuarial equivalence changes per the terms of the plan document and it is a two edged sword. The benefits/conversions can increase/decrease per the pre-existing terms of the plan without it being considered a violation of 411(d)(6).

Having spent quite a bit of time recently analyzing the 417(e) rates and what uses they are/can be/ put to, I'm fairly comfortable relying on pre-PPA document provisions that incorporate automatic changes as being exempt from 411(d)(6) concerns. Of course, one should confirm same with an ERISA attorney if they have a specific case that needs this.

I am looking at the opposite issue for a client. They would like to grandfather the old assumptions, proviing particpants with the greater of (i) the lump sum amount under the pre-2008 assumptions or (ii) the lump sum amount under the 2008 assumptions. I am concerned that the plan may have to perform Section 401(a)(4) nondiscrimination testing for the 5-year period. The amendment would be neutral on its face and would not be a subterfuge to preserve a greater benefit for HCEs near retirement (in fact, they are concerned about long-term NHCEs near retirement), but both HCEs and non-HCEs could benefit and elect a lump sum during the five-year period and it is impossible to know how the elections will play out. The different assumptions may make the two lump sums two optional forms of benefits. Is anyone else looking at this?

[KimberlyC]

I am looking at the opposite issue for a client. They would like to grandfather the old assumptions, proviing particpants with the greater of (i) the lump sum amount under the pre-2008 assumptions or (ii) the lump sum amount under the 2008 assumptions. I am concerned that the plan may have to perform Section 401(a)(4) nondiscrimination testing for the 5-year period. The amendment would be neutral on its face and would not be a subterfuge to preserve a greater benefit for HCEs near retirement (in fact, they are concerned about long-term NHCEs near retirement), but both HCEs and non-HCEs could benefit and elect a lump sum during the five-year period and it is impossible to know how the elections will play out. The different assumptions may make the two lump sums two optional forms of benefits. Is anyone else looking at this?

[Mike Preston]

In general, I think you are ok. You aren't amending the plan to provide a larger benefit, you are merely not amending the plan to provide a smaller benefit (or, better I should say, you are amending the plan to provide a benefit which can't be lower than it was under the plan prior to the amendment).

Keep in mind that unless the IRS issues some sort of dispensation, the provision you describe will give rise to another alternate form which is required to be taken into account under the plan like any other alternate (and potentially subsidized) alternate form. This may not mean much, but then again, it may mean a whole bunch. Stated another way, there are certain rules which give a free pass to 417(e) subsidies. Any such free pass would not apply to the benefit payable under the plan based on the prior-417(e) structure.

One of the most prominent is the requirement that the plan provide a QJ&S form of benefit which is the most valuable. There is an exception for 417(e) subsidies. You would therefore have to modify your calculation of the QJ&S, which no doubt ignores 417(e) at the moment, to ensure it is no less than the actuarial equivalent of the benefit calculated on the grandfathered assumptions.

Of course, the IRS may come out with another exception to the most valuable rule allowing one to ignore the type of grandfathering you are describing. But I haven't seen it to date.

[YankeeFan]

I would like to revisit this topic. Does Notice 2008-30 provide 411(d)(6) relief in the case of plans that did not calculate lump sums using either the Pre-PPA Applicable factors or PPA Applicable factors, whichever produces the greater benefit?

For example, assume a plan used the PPA Applicable factors to pay out lump sum during the 2008 plan year. The plan did not pay out lump sums based on the greater of the Pre-PPA Applicable factors or PPA Applicable factors. A plan amendment was executed in January 2009 that adopted the PPA Applicable factors for purposes of calculating benefits subject to 417(e)(3).

Should the plan have used the greater of approach (Pre-PPA Applicable factors or PPA Applicable factors) to determine lump sums until the adoption date of the amendment signed in January 2009 or does Notice 2008-30 provide any sort of relief in this case?

[Mike Preston]

Total and complete relief, as far as I know.