New law interest rates

[FAPInJax]

The new law (Job Creation and Worker Assistance Act - who dreams up these names) has new interest rates which are used for 2002 and 2003 plan years.

Specifically, the high interest rate used for deficit reduction calculations (quarterly contributions too) and the interest rate used for PBGC premiums.

The PBGC premium is easier because it just changes the 85% to 100% but everything else stays pretty much the same.

The other interest rate is used to determine whether quarterly contributions are needed (same for deficit reduction). The question is that one of the effects is to increase the funded percentage. Can this calculation be redone for the 2001 plan year so that 2002 does not require a contribution???

I think the answer is yes but am having trouble finding a cite.

Anybody agree???

[MGB]

The only thing that may be redone for 2001 is to recalculate the minimum and funded percentage, but only for purposes of determining the amount of the quarterly in 2002 and whether you have to (based on the 2001 funded percentage) contribute quarterly in 2002. The actual contribution for 2001 is not changed and the funded percentage for 2001 when looking back for volatility tests under 412(l) are not changed.

Note that the Portman-Cardin stock (Enron) bill in the House would extend the relief back to 2001 to redo minimum contributions for that year, also.

[david rigby]

If it helps to have more than one reply, MGB is (as usual) correct.

[Mike Preston]

Frank, weeding through the law, the answer is yes, as noted.

Just one addition. It appears that the recalculation of the current liability is effective for all purposes, including the pre-termination restrictions of the non-discrimination regs under 1.401(a)(4)-5(B)(3)(iv).

[Chester]

A word of caution in that the current liability interest rate range for the OBRA 87 full funding limitation has not changed and is still limited to 110% of the weighted average rate for 30 year Treasuries.

[MGB]

Mike,

I've taken a more conservative (not my usual style) view of the high 25 calculation.

There is no particular method required to be used for this. The actual rule is any "reasonable and consistent" method of determining current liability.

It is the word "consistent" that bothers me. For example, assume a person has been restricted, but received the distribution and is holding escrow (or bond, letter of credit, etc.). If the prior calculations were using the rate under the prior law, then switching to the 120% to determine if they are still restricted may be viewed as not being consistent.

Using 105% under 412(l)(7)©(i)(II) (or 110% under 412(B)(5)(B)(ii)(I)), and then switching to 412(l)(7)©(i)(III) in 2002 and 2003 does not seem consistent to me. (I have heard the argument that "my consistent method is to use the highest rate available," but I don't go along with it.)

On the other hand, if, in 2002 or 2003, this is the first calculation ever under the plan of this type, then using 120% "may" be deemed allowable, but I am not ready to endorse that.

In any case, I would not accept using 120% in 2001.

[Mike Preston]

MGB, the reasonable and consistent standard you mention lends itself to a determination that is case specific. The language itself seems to be a very loose standard and one that would easily support the "highest rate available" in some circumstances.

I have always thought that there should be a good dose of practicality built into these calculations. In the original proposed regs the IRS provided a number of examples on how to implement the restrictions. They removed those examples in the final regs. In my view, the timing issue has been and continues to be more troublesome than the interest rate selection.

For example, assuming a plan with 10,000 participants, with a 1/1/2001 valuation date, would the determination of x% of current liability (either 105% or 120%) require re-calculation in order to satisfy the reasonable and consistent standard? If so, at what point? Assume the determination is being made on 2/1/2002 due to a request for a lump sum on that date. Is it really reasonable to revalue a 10,000 life plan in order to establish compliance with the restrictions?

I guess my point is that if the current liability calculations in the underlying valuation have been changed to reflect the higher interest rate now allowable, requiring a second current liability determination at another interest rate in order to satisfy the reasonable and consistent standard may be asking too much.

This seems like an opportune time to request clarification on how to apply the restrictions from the IRS.

[Mike Preston]

MGB, the more I think about this, the more I think that the reference to reasonable and consistent applies to the benefits to include and the methodology of valuation, but not to the interest rate selection.

However, I don't think it is necessarily a given that every plan can automatically use the 120% multiplier in the determination of the interest rate under 412(l)(7). It seems like there are a couple of steps that one needs to go through.

First, the RPA Current Liability Interest Rate as defined in 412(B)(5)(B) has to be higher than what the 412(l)(7)©(i)(I) rate would have been using the pre-law change multiplier. If, and only if, the RPA rate exceeds the old rate, then one can use a rate as high as 120%. Otherwise, one is stuck with 105%. Unless I'm reading it wrong.

But I still feel that whatever rate one ends up with under 412(l) is the rate that is used under 401(a)(4)-5.