Rev. Rul. 98-1 and 415(b)

[Guest 1950]

This is probably a stupid question, but it has me stumped, and I would certainly appreciate your guidance.

Specifically, my question relates to Rev. Rul. 98-1 Q&A-8 and the conversion of a lump sum benefit to a "straight life annuity" for purposes of applying 415(B) to a DB plan.

In the example in Q&A-8, the participant has an option to take the benefit in the form of a lump sum, which on the facts works out to be $950,000. In converting that to a "straight life annuity" as required by 415(B)(2)(B), the Answer says "Thus, the equivalent annual benefit must be the greater of the equivalent annual benefit computed using the plan rate and plan mortality table (or plan tabular factor) and the equivalent annual benefit computed using the applicable interest rate and the applicable mortality table."

The example there says the plan rate is 6% and the plan mortality table is UP-1984 and that the "applicable interest rate" is 8%. The example goes on the calculate the "straight life annuity" equivalent of the $950,000 lump sum by (1) converting the $950,000 to an annuity using 6% and UP-1984 (which turns out to be $89,656), and (2) converting the $950,000 to an annuity using 8% and GAM-1983 (which turns out to be $94,078), and (3) then selecting the higher of the two.

That doesn’t seem consistent with 415(B)(2)(E)(i) and (iv), which I read to say that you determine the actuarial equivalent "straight life annuity" of the benefit in question by converting it to a straight life annuity using:

(1) The higher of the plan rate and the "applicable interest rate" AND

(2) The “applicable mortality table”...

and that's the end of it. The plan mortality table is not used in this step at all.

I understand that the plan mortality table would definitely come into play in calculating the $950,000 lump sum. But once that's done, I read 415(B) to say you're through with the plan morality table. More specifically, by my reading 415(B)(2) simply says you (1) pick the higher rate between the plan rate and the applicable interest rate (which here would give you 8%) and (2) you apply the "applicable mortality table" (i.e., GAM 83) and the result is the "straight life annuity" amount that you test. I don't see anything in 415(B)(2) that says you do this calculation using the plan mortality table and the plan rate and compare that to the result using the applicable interest rate and the applicable mortality table.

Consider: what if the applicable interest rate were 4% and the plan interest rate (as in the example) were 6%. According to the ruling, it seems you'd compute two annuity amounts, one using 6% (the plan interest rate) and the plan mortality table (UP-1984), the other using 4% and the applicable mortality table (GAM-83), and you'd select the larger. However, 415(B) seems to say you'd just use 6% and the applicable mortality table... which will definitely give you a different result.

What am I missing?

[rcline46]

415(B)(2)(E)(v) - added mortality to the adjustments. This is explained in the preambles to 98-1, so 98-1 is effectively the regs interpreting 415(B) adjustments.

[Guest 1950]

rcline46:

No, actually, the "mortality" aspect of this calculation has always been in 415, it's just that before RPA 94 (GATT), the mortality table to be used for this purpose was not specified in the Code or the Regs. In fact, that's the point of RPA 94 (GATT), which, among other things, specified that instead of using whatever mortality table the plan would normally use for actuarial calculations -- which is how it worked before RPA94 (GATT), you now must use the mortality table prescribed by the Secretary.

The preamble to Rev. Rul. 98-1 just recites this fact: "Section 767(B) [of RPA 94 (GATT)] added 415(B)(2)(E)(v), which requires the mortality table prescribed by the Secretary to be used for adjusting any benefit or limitation uner 415(B)(2)." That's not really adding or changing anything.

I agree the mortality table you must now use comes from 415(B)(2)(E)(v), but is specifies ONE table -- THE "table prescribed by the Secreratary" (sometimes called the "applicable mortality table"). And therein is exactly my point, question and confusion: nothing in 415(B)(2)(E)(v) says anything about using two different mortality tables to compute different amounts and then comparing the results, which is what is done in Rev. Rul. 98-1, Q&A8 (and in a few other places in the rev. rul.). (By the way, these examples came from Rev. Rul. 95-29, and I'm wondering if the IRS just moved them over and left out something that would have made this make sense.)

It is true that in making the calculation you pick between 2 interest rates for this purpose -- that's required by 415(B)(2)(E)(i) and (ii), but nothing in 415 says you pick between two mortality tables or that you do alternate calculations with two different mortality tables (and compare the results).

I'm sure I'm missing something -- but I can't find the missing piece in the preamble to Rev. Rul. 98-1. And I can't find any authority for the approach used in Rev. Rul 98-1. It seems to just recite the law (in the preamble) and then ignore it (in the analysis).

Very puzzling. Can't reconcile.