whipsaw

[Gary]

a plan provides interest credits using the nov 30 yr rates and a lump sum based on the april 30 yr rates.

thus it is possible for the interest credit rate to be higher than the lump sum rate.

so in theory the pvab could be higher than account balance.

can a plan pay lump sum equal to account bal, citing that the interest credit rate complies w/ a 96-8 safe harbor rate and thus automatically doen't violate 411 or 417(e)?

any thoughts?

gary

[Blinky the 3-eyed Fish]

A design like this makes me wonder what someone was thinking when it was designed.

As pax would write, "What does the document say?". I don't think your argument holds water because it is contrary to the document.

I recommend fixing it ASAP because there is that one-year period where the plan must give the greater benefit when changing 417(e) provisions.

Additionally, I assume it is not a calendar year plan, and that is why April is an acceptable lookback month.

[Gary]

the plan pays the account bal as the lump sum. the doc. may provide the same. however, i am referring to regulation compliance.

i.e. is it legal in this instance to pay account or s/ it be compared to pvab using the 2 different 30 yr rates?

i.e. is it a whipsaw violation or is it acceptable to pay the account in this situation?

[mbozek]

I thought there were several cases under ERISA that upheld the the requirement to pay benefits that were determined under the 417(e) interest rate if it produced a larger lump sum value than the plan provision to pay the account balance. There was a case involving Fleet bank in VT and another case in Ga. Have you talked to counsel for the employer about this?

[Gary]

i'm aware of cases on this matter.

however, i am questioning if in this case the interest credit rate meets 96-8 safe harbors and thus enables a plan to pay the account balance.

this issue probably rests in the interpretaion of 96-8.

[MGB]

I recently reviewed a plan similar to this and concluded that it does comply with Notice 96-8. Having two different 30-year rates is similar to using one of the non-30 year rates in Notice 96-8 (which allow the addition of basis points, too). It is possible (e.g., a flat or inverted yield curve, or high CPI) for one of the other rates to be greater than the 417(e) rate. That situation would still give out the cash balance, even though the PVAB (using the 417(e) rate) of the projected benefit is greater.

The numerous court cases on whipsaw are irrelevant to whether or not a plan is complying with Notice 96-8.

Having said that, please note that Notice 96-8 is very sketchy as to whether it would be considered controlling guidance in a court case. The notice was only describing a "suggestion" of what they may put into future proposed regulations...it does not provide a safe harbor. Those regulations have died and are not expected to reappear unless there is a major change in the mindset of certain IRS and Treasury personnel who hate everything about cash balance plans. I would be very nervous trying to justify in court any cash balance arrangement as being allowable just because it satisfied Notice 96-8.

[mbozek]

I dont think that any court would regard notice 96-8 as authority for determining the pv of a lump sum benefit under 417(e) since it is not a formal regulation. U still need to review the ct cases to see how the 417(e) requirements are to be implimented in coordination with the cutback rules. My recollection of the cases is that the pv as determined under the 417(e) rates is the mimimum amt that can be distributed-- If the plan formula provides for a greater pv then the plan must pay the greater amt.