actuarial equivalence

[Gary]

plan defines act equiv as 7% and up84 with a 1 yr setback.

for j&s payouts act equiv is 7% and up84 no setback for participant and 3 yr setback for co annuitant.

no for the dilemma.

say we have a participant age 65 and spuse age 60.

if the pension were paid as a life annuity it would be pvab using 7% and up84(-1). say this amount is 150,000.

then for a j&s, using the j&s act basis the pvab of such benefit is only 152,000. this difference is due to the different mortality tables for the different payout options.

i see this as a flaw and feel that the j&s factor should be a factor that would result in the pvab of such j&s benefit to be the same as the life option. i believe that all optional forms s/b act equiv to normal form.

any comments?

gary

[david rigby]

I'm not sure there is a requirement that all forms have to be actuarially equivalent to each other. Only that they have to be actuarially equivalent to the normal form, using the definition of AE in the plan.

[Mike Preston]

Why would the j&s annuity be anything other than 1091.55, rather than the single life benefit of 1395.40? Both are valued at $150,000 lump sum under their respective actuariial equivalency provisions.

[Gary]

let me clarify a little.

under the life annuity form and the up84 (-1) table the pvab was 155,000.

under the chosen j&s form and the 0,-3 tables the pvab of the benefit wasonly 152,000. this occurred due to the j&s factor based on the 0,-3 tables.

so the question is

s/ the j&s factor be such that it produces a benefit that has a pvab of 155,000, to be the same value of the life annuity form?

although a plan can have a 50% j&s benefit that is fully subsidized (i.e. no reduction), thus being worth more than the life annuity.

but i'm not sure if a j&s benefit is allowed to be less than a life annuity (the normal form for unmarried participants).

[Mike Preston]

Instead of clarifying a little, how about clarifying a lot? What, precisely, was the life annuity? What, precisely, was the J&S that the plan offered to pay?

[Gary]

you asked for it.

participant: age 57

immediate annuity: 1,248 per month

spouse's age: 54

act equiv int: 7%

mortality for life annuity: up84 (-1)

mortality for j&s annuity: up84 (0,-3)

the plan determined the 50% j&s factor (with pop up feature) to be 0.8994. so if the participant outlived the spouse the pension would revert to 1,248.

normal form is life annuity.

it produces a higer pvab for the life annuity then for the j&s annuity. thus the alleged flaw.

see what you all discover.

[Mike Preston]

The benefit that the document calculates is faithful to the theory that the actuarial equivalence under the terms of the plan is UP84(0,-3) at 7%.Given a life annuity benefit of 1248, the calculation of the benefit (B) is:

B = [ 2 * 1248 * a(x:y) ] / [a(y) + a(x:y)] where:

a(x:y) = 112.41

a(y) = 137.55

where x=57 and y = 54

yields:

B= 1122.48

which is almost exactly equal to your 1248 * 0.8994 factor (1122.45).

I can also show the formula from first principles using N's and D's, so I'm pretty sure it is correct. My thanks to Rick Block from Manhattan Beach for checking my first principles formula and helping me distill it down to the above simple expression.

Hence, the calculation completely ignores the up84(-1,-1) mortality in this determination.

If one were to calculate a benefit (B) which is not less than the actuarial equivalent of the single life annuity of 1248 valued at up84(-1) at age 57, the resulting pop-up annuity would need to be increased by:

1248 * (a(x)' - a(x)) / (a(y) + a(x:y)) where

a(x)' = 127.19202 and

a(x) = 124.92844

which yields an increase to the benefit of $11.30, for a total of $1133.75.

But, getting back to your question, is this a government plan or a plan not subject to 411? If so, I'd say there is absolutely no problem.

However, if it is a plan subject to the rules of 1.401(a)-20, which has somewhere in there the rule that the J&S benefit must always be the most valuable benefit offered, and *if* this benefit (the pop up) is *the* qualified j&s benefit under the plan, then you *might* have an issue. OTOH, if the plan has an LOD then I think you have 7805(B) relief even if the IRS decides to pick on this issue.

So, tell us: is it a governmental plan?

If not, is there another j&s benefit offered (maybe one without the pop-up) that is the *qualified* j&s benefit under the plan?

If not, does the plan have an LOD on this language and the equivalence factors?

If no to all three, I think you should let the plan sponsor know that there is a potential problem. Any knowledge as to why the actuarial equivalence for j&s (up84(0,-3)) is different from the actuarial equivalence under the plan for determination of lump sums (up84(-1,-1))?

[Gary]

it is a private plan with the 50% j&s (no pop up) as the normal form.

i arrive at a revised benefit of 1,147 as compared with your 1,133. with the pop up the annuity reverts back to the annuity of 1,248 if the participant survives the spouse.

not sure if they received a determination letter.

[Mike Preston]

If they have a 50% j&s as the normal form, that qualifies as the "qualified" joint and survivor. They are therefore free to use any reasonable actuarial equivalence for other benefits. If that ends up subsidizing those other benefits, then the qualified joint and survivor must be improved to ensure compliance with 1.401(a)-20. However, in this case, they "penalize" the participant a bit (at least with these ages) so it is merely the "cost of conversion" that the participant bears in order to sign up for that benefit.

Recognize that they can't go the other way. If the pop-up were based on actuarial factors more valuable and the pop-up was not the qualified j&s, then they would need to adjusst the qualified j&s.

I think your plan is fine, at least at these ages. I wonder whether there aren't ages that would require an adjustment. I'll leave that to somebody who wants to play with the formula as given.

If you got 1147, then show your formula. I've shown mine.

[Gary]

i will follow up with my formula.

back to my earlier issue. that being, is it acceptable for a plan to provide (as in this case) a 50% j&s with pop up that is worth less than the normal form for an unmarried participant (i.e. a life annuity). the plan actually failed to say the 50% j&s was the normal form and only listed the life annuity, which to my knowledge is in itself a violation. but still want to address the issue above, which to me is that other forms must be at least the act equiv of the standard life annuity (normal form).

[Mike Preston]

There is no requirement that alternate forms be actuarially equivalnet to the normal form on any particular basis. Yes, RR 79-90 requires that each benefit be definitely determinable by specifying the assumptions to use for each potential benefit, but I'm not aware of the requirement you mention.

Keep in mind that subsidies require special treatment, so it is common practice to ensure that there is a small "cost" associated with some alternate forms. If the participant doesn't want the "option" they can decide not to pay the price.

[MGB]

I agree with Mike P that you are mixing a general requirement (that the alternative forms must be at least the actuarial equivalent of the normal form) with language about actuarial equivalencies in the plan. The plan's definitions of the basis to use for actuarial equivalent is irrelevant to the general requirement. The bottom line is whether you could withstand scrutiny of the amount of the alternative form using reasonable assumptions in court. If UP84 (0,-3), 7.5% is reasonable, then discussion is over with. UP84 (-1,-1) never enters the analysis.