Distribution and GATT rates

[dmb]

An attorney is drafting a GUST document for one of my clients. One of the sections explains the rates used to calculate the PVAB. It says to use either the Act. Eq. rates (which includes language for the 30 yr rate) or the PBGC rates, whichever rates produce the greater benefit. I don't think that the PBGC rates should be included in this document and I'm looking for some confirmation.

Another issue came up. The question is when the GATT rates replace the PBGC rates prior to the adoption of the GUST document. I was under the impression that prior to 2001, valueing lump sums would be based on the greater of benefits provided by using GATT rates or rates specified in the plan doc (including PBGC rates). And beginning in 2001, PBGC rates would no longer be used. The attorney thought the cut off date for using the PBGC rates was the adoption of the GUST document, not 2001. Any confirmation or correction would be appreciated.

Thanks.

[Guest earthy]

I think the Attorney is correct on both points. Shortly after GATT was enacted in 1996, the IRS issued a notice on the use and application of the "applicable mortality table" for PVAB purposes. If my memory is correct, this notice pointed out that the greater of the PBGC rates or the 417(e) rates would need to be used.

There is a subsequent Notice on the the application for GUST purposes. I'll research and send along the IRS Notice #'s for you.

Earthy

[dmb]

Thanks for the response, the main issue of my question is when to stop using the PBGC assumptions, when the GUST doc is adopted or after the 2000 year??

Thanks.

[Guest Harry O]

There was never any requirement to stop using the PBGC rates. The only thing that happened was that the law changed the basis for determining minimum lump sums -- it used to be based on plan mortality and PBGC interest. It is now a statutory mortality table and 30-year treasury rates. But a plan is free to continue to use the old PBGC basis as long as this methodology does not result in a lower lump sum than the new GATT rules.

The exemption to section 411(d)(6) for transitioning from PBGC to GATT is too complicated to get into at this time of night!

[dmb]

Thanks again.

It was my understanding that when a document refers to 417e rates, those rates are now the 30 yr rate and the 1983 GAM table, instead of the PBGC rates.

[AndyH]

Harry O's comments are (as usual) completely true. I would just add that because this document sounds so messed up, you should make sure that the pbgc rates are not part of the "applicable interest rates" for 415 purposes, because only the 30 year treasury GATT references belong there.

[Guest merlin]

I agree with all the previous posts,but why write the plan with a 3-way comparison terms of interest rates in the first place? It will be nightmare to administer, not to mention explain to your client(or to a disgruntled participant ,or worse, a jury).Will your valuation program or spreadsheets handle it? And in our new world of declining plan asset values you'll make what is probably an already bad situation worse.Grandfather whatever values you have to but make a clean break with the PBGC rates.

[AndyH]

Agreed, but, as an aside, what now with 30 year bonds no longer being issued?

[MGB]

The nonissuance of 30-year bonds only means their yield will continue to decline. There are still $600 billion of them in circulation and will be around for almost another 30 years. None have ever matured...they only started being issued in 1977. Although the first maturities are a few years off, the Treasury has a separate program whereby they are buying back a small portion of outstanding bonds. That will probably recede with their higher cost and our movement into deficit spending.

[Gary]

As a supplement to what has been said. My understanding is that if a Plan had not been amended for GATT by 2000, then beginning in 2000 GATT had to apply as well. That is, until an amendment for GATT, Plan would have to use max of GATT and PBGC (assuming that was in current plan). And when Plan was amended to replace PBGC with Gatt, then only GATT would apply, preumably incorporating the one year transition requirements for a change in the timing of the applicable interest rate.

[Guest merlin]

You are correct. This was confirmed by Jim Holland and Dick Wickersham at the 2000 ASPA conference.