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Change in Actuarial Equivalent Assumption

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Given: Actuarial Equivalent (AE) interest rate was changed from 30-Treasury rate to 5%.

Question:

How does this change affect Lump Sum calculation?

Do you have to take both interest rates into consideration when calculating lump sum?

Thanks.

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The lump sum is the greater of the value using both the 417(e)(3) rates and applicable mortality and the actuarial equivalent rate.

In addition, the greater of the calculation using the old actuarial equivalent and the new actuarial equivalent must be used until one year after the date of adoption of the amendment. Since your actuarial equivalent was using 30-year treasury and not the segment rates, you should do this calculation too.

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Caroline, I don't agree. The one year rule is specific only to the substitution of one 417(e) rate for another. "Regular" actuarial equivalence has permanent 411d6 protection with respect to the accrued benefit on the date that the assumptions were changed.

If they had changed from 30yr Treasury (old 417(e)) to segment rates (new 417(e)) on a timely basis, I don't even think there is a year overlap.

This area confuses many.

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Mike, I was just about to comment the same way when you posted. I agree that I don't think it is that simple.

First, I am assuming you are asking specifically about the actuarial assumptions used to calculate lump sums and not those used to determine monthly annuity options.

Secondly, because the plan is still using the 30-yr rate for lump sums (and didn't change within the approved window when the law changed to the segment rate method) I think you are stuck with the 30-yr rate at least on benefits accrued before the change.

Rev. Rul. 81-12 provides that a change in actuarial assumptions that results in a decrease in the accrued benefits of any participant would violate the benefit protection of IRC 411(d)(6).

1. In general, a plan may only change actuarial assumptions without regard to IRC 411(d)(6) if the change is limited to additional benefit accruals after the later of the date the amendment is effective or adopted.

2. However, Rev. Rul. 81-12 provides a permissible method of changing actuarial assumptions so that the new assumptions may be used with regard to all benefit accruals, including those accrued before the date of the change. To use this option, the plan must provide that the benefit determined under the new assumptions will not be less than the benefit that had been accrued as of the date of the change, determined under the prior assumption.

I think the one-year window only comes into play if you are changing things like stability periods or look back periods. I think changing from 30-yr rate to 5% would fall into a protected 411(d)(6) benefit.

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"Secondly, because the plan is still using the 30-yr rate for lump sums (and didn't change within the approved window when the law changed to the segment rate method) I think you are stuck with the 30-yr rate at least on benefits accrued before the change.

Secondly, because the plan is still using the 30-yr rate for lump sums (and didn't change within the approved window when the law changed to the segment rate method) I think you are stuck with the 30-yr rate at least on benefits accrued before the change. "

This is the crux. I don't have time to look it up today but I thought there was an exception to 411d6 notwithstanding the timing of the change in 417(e) rates which conform to PPA.

This would mean that it is critical how the document is drafted. If the 30yrTSR was referenced only once and "replaced" for 417(e) purposes by the applicable rates then it very well MAY escape 411(d)(6) protection.

At this point, the issue is highlighted and it would seem that the best course of action would be for the plan to hie thee to an ERISA lawyer!

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