Rev. Rul. 2001-62 - The New Mortality Table for sec. 415 & 417(e)

[Guest ircreader]

Our actuaries are concerned that using the new mortality table required by Rev. Rul. 2001-62 will result in a lower value for annuity distributions and cash balance calculations in violation of 411(d)(6).

I am reading the language of the Rev. Rul. that states "... a defined benefit plan must provide that the present value of any accrued benefit and the amount of any distribution, including a lump sum, must not be less than the amount calculated using the applicable interest rate described in sec. 1.417(e)-1(d)(3) ... and the applicable mortality table described in sec. 1.417(e)-1(d)(2). The present value of any optional form of benefit cannot be less than the present value of the normal retirement benefit determined in accordance with the preceding sentence."

And, I am reading the language that states, "A plan amendment will not violate sec. 411(d)(6)(B) of the Code and the corresponding provision of ERISA solely because of a reduction in any annuity distribution with an annuity starting date on or after the later of the adoption date or the effective date of this amendment if the cause of such reduction is the substitution of the table in this revenue ruling for the table in Rev. Rul. 95-6."

I told them as long as the present value of the annuity is not less than the present value of the normal retirement benefit determined in accordance with Rev. Rul. 2001-62, there will not be a violation of IRC sec. 411(d)(6).

Does anyone else agree with this conclusion?

[Gary]

your conclusion makes sense to me.

when does or did this new mortality table take effect for lump sums under 417(e)?

and can you send me a copy of the rev rul?

gary

[MGB]

I disagree with your conclusion. The present value is irrelevant. The issue is whether the accrued benefit (defined as an annuity) is decreased by adopting the new table. If you are projecting and converting using the old table and now will switch (this includes making use of the safe harbor approaches for cashing out the cash balance), then there is a decrease due to the amendment and you must grandfather the existing annuity amount at the time of the switch.

The only open issue is whether or not a plan that references the applicable mortality table under 417(e) (instead of specifically stating the table) is actually going through an amendment subject to anti-cutback. My position is that this is reference to an outside index similar to the interest rate that does not need to be grandfathered. However, in unofficial verbal guidance, Jim Holland has indicated that this, too, is subject to grandfathering. For most people, Jim's opinion trumps my opinion.

To make matters worse, however, I (and many others) believe that this is a 204(h) notice situation for all cash balance plans, which needs to be sent out by November 16.

[david rigby]

As usual, MGB is correct.

Gary, here is a link to the Revenue Ruling: http://www.taxlinks.com/rulings/2001/revrul2001-62.htm

[Guest Harry O]

I think Jim Holland is full of hot air.

If the plan document references the "applicable mortality table" and that table changes, there is no amendment that needs to be made to the plan document at the time of the change.

You need an amendment to trigger a 411(d)(6) violation and you need an amendment to trigger a 204(h) notice. Where is the "amendment" in this case.

In addition, in most cases I have seen, the switch to a new mortality table results in a 2-3% decrease in the accrued benefit. This is arguably not "significant" for 204(h) purposes.

[david rigby]

That might be a bit oversimplified. For example, I have seen lots of documents that include the "applicable mortality table as defined in Rev. Ruling 95-6". So, amendment would be required.

[Guest ircreader]

Thank you everyone. I think it will be safer to follow the advice of MGB. I don't want to take any chances with this. I appreciate everyone's advice.

[MGB]

Harry O:

I agree with your reasoning about significance in later years. However, look at what happens in the first year following the change for someone with many years of past service. Due to the grandfathering, the one-year accrual of an annuity benefit may be cut in half or more (it can even be zero for older participants). That is a significant reduction. The new regulations require an analysis in every individual year in the future. You are not allowed to look at the bigger picture over the long run. Whenever you have wearaway under a grandfather (like this situation), a 204(h) notice is required.

Taking this to its absurd conclusion, imagine a final-pay plan that is amended to have a minimum flat-dollar benefit that is higher than some participants' accrued benefit. Under the amendment, they have a wearaway grandfather. During the first few years, they have no accrual. Now, even though everyone has higher (or the same) benefits at all times after the amendment than they did before the amendment, is this a 204(h) notice? This has been posed to those at the IRS that worked with the 204(h) notice regulations and they say yes. Their focus is on the rate of accrual in each individual year. And, because some people would have accrued a benefit in the next year and now will not (because they already accrued it under the amendment), you have a 204(h) notice. This conclusion is all a result of the outcry over cash balance conversion wearaways that previously may not have been fully disclosed. The government is not about to back off of this stance.

[Guest Harry O]

You raise some good points. But I guess I still come back to the same question . . . where is the "amendment" that triggers a 204(h) obligation?

[Guest ircreader]

Unfortunately, our plan will require an amendment because it requires the actuary to use the factors in effect under the Plan for the last day the Participant had service. The Rev. Rul. requires the new mortality table to be used for all distributions commencing after 1/1/2003. So even if the Participant terminated prior to 1/1/2003 I think we will have to use the new mortality table if the Participant commences benefits after 1/1/2003.

Since the amendment will result in the use of a new mortality table that could potentially result in a reduction, I assume 204(h) notice must be given.

We do refer to the applicable table under Section 417(e) of the Code so we don't really need to amend that language in the plan. We have an additional wrinkle - we offer the greater of FAP or account balance to all participants with service prior to the cash balance conversion date. So, we have two groups of participants - those with service prior to the conversion date who get the greater of option and those with service after the conversion date who get account balance only.

We are studying the issue. We have people on both sides of the issue - those who say grandfather and send 204(h) and those who say just grandfather. I wish the IRS had made this a little more clear for those of us who really want to follow the law.

[MGB]

If you really want to follow the law closely, be sure to note that the date is NOT 1/1/2003, it is 12/31/2002. For a calendar-year plan, the new table must be in effect for at least one day this year, which also means the amendment must be adopted prior to year-end.

[Guest Harry O]

This whole thread is a microcosm of why defined benefit plans are dying. Surely the IRS could have found a way to exercise regulatory authority to avoid all these "gotcha" issues when they adopted the new mortality table. This reminds me of the change a few years ago where Congress eliminated age 70.5 distributions for active employees. A simple, welcome change. But the IRS got their hands on it and made it a complete mess with all sorts of section 411(d)(6) issues. In the end, it was easier just to keep the darn thing in the plan unchanged. DB plans will continue to dwindle unless someone at the IRS stops twisting themselves in knots over technical issues and starts taking common-sense approaches to these plans and their special needs.

P.S. DB plans are also well on their way to becoming the next tobacco industry for plaintiff's lawyers. But that is a thread for another day . . .

[J2D2]

Can I get an "Amen" for Harry O!

"AMEN!"

[Guest ircreader]

AMEN! I hope someone from the IRS reads Harry O's comments.

[MGB]

I said similar things in my oral testimony directly to the IRS two weeks ago. That was a hearing on the minimum distribution regulation nightmare (1.401(a)(9)-6T), which outlaws COLAs (other than CPI), variable annuities and many forms of death benefits ater the annuity starting date. One more nail in the DB coffin.

Of course, it didn't faze them a bit. They gave the distinct impression that they see DB plans as nothing more than tax-avoidance schemes rather than retirement plans. Perhaps we need to reverse the 1978 reorganization plan that moved most of the jurisdiction from the DOL to the IRS. We obviously need someone in government overseeing these rules that has a view other than "how much tax revenue is being lost?"

[Guest merlin]

My understanding of the effective date for using 94GAR is as described by MGB a few posts earlier. I was just told by an attorney whose document I had reviewed that as long as the amendment is adopted by 12/31/02,the effective date could be later,say 1/1/03.Is he correct or confused?

[Guest ircreader]

The Rev. Rul. states: "The required use of the mortality table in this revenue ruling is effective for distributions with annuity starting dates on or after December 31, 2002, except that a plan may specify any earlier date during calendar year 2002 as the effective date for the required use of the mortality table in this revenue ruling under the plan."

MGB was correct in the earlier post. I was operating from memory and being sloppy by just stating 1/1/2003 but MGB was correct in reminding me that it is 12/31/2002. Thank you, MGB. We have learned that IRS sources are saying that if a plan makes reference to the applicable mortality table and no amendment is needed, there is no 411(d)(6) violation without an amendment. Harry O raised the point that there has to be an amendment to trigger the need for 204(h) notice in an earlier post.

[MGB]

I am not sure what your IRS sources are, but here is Jim Holland's opinion:

All plans need an amendment. Those plans that refer to the applicable mortality table do not have definitely determinable benefits during 2002 because there are two possible applicable mortality tables. Therefore, you need a clarifying amendment to specify the effective date of adopting the new table. (And, once you have an amendment, then all plans are subject to 204(h) notices.)

On the other hand, I have also heard second-hand that the author of the Revenue Ruling did not intend for this result. He thought that he was writing it in such a way that the effective date by default was 12/31/02, and only those plans that actually formally adopted it earlier had a different effective date.

Although that is what he thought he was doing, a careful reading of it does not lead you concisely to that conclusion, and that is why Jim Holland feels differently. So, as is usually the case, sloppy writing is making law instead of intent. Again, Jim Holland's opinions generally trump those of a lower level writer of a Revenue Ruling.

I have also received more information on the cash balance grandfathering. The issue is that the IRS does not have the authority to grant 411(d)(6)(A) protection for the calculation of the accrued benefit (which is what you are doing in the cash balance conversion). They only have authority under 411(d)(6)(B), which is in conjunction with optional forms (so the changes in 417(e) for lump sums don't have to be grandfathered). That is why Holland has been claiming the protection stated in the Revenue Ruling cannot be extended to the cash balance annuity calculation.

[Guest ircreader]

Thank you again, MGB. As you probably guessed already, I am coming up the learning curve in this area. Please tell me who Jim Holland is. I'd like to take the opportunity to tell you how much I appreciate your posts.

[MGB]

I am not sure of the actual title, but Jim Holland is Manager of the Technical portion of the Employee Plans Division. The entire actuarial staff of the IRS is under him (he is an actuary). No guidance comes out of the IRS without his input. His views carry the most weight of anyone at the IRS and he has been there for about 25 years. Around a decade ago, they split up the division into two parts, with him over only one side (sort of a demotion and loss of power). Ken Yednock was one step over him. However, Ken retired in the past year and Jim moved up into his position. There is probably no one else that knows as much about every detail of every rule off the top of his head, along with the history of the reasoning for them. When he speaks at conferences, people take it as gospel rather than opinion.

[Guest ircreader]

Thank you, MGB. I have learned so much from you already. I am looking forward to learning much more.

[Guest Harry O]

It looks like Jim Holland is blowing smoke again. I don't see how there can be two possible mortality tables and non-definitely determinable benefits in 2002.

I assume ircreader's excerpt from the Rev. Rul. is correct: "The required use of the mortality table in this revenue ruling is effective for distributions with annuity starting dates on or after December 31, 2002, except that a plan may specify any earlier date during calendar year 2002 as the effective date for the required use of the mortality table in this revenue ruling under the plan."

If a plan does nothing, GAR 94 becomes effective 12/31/02. The only way GAR 94 can become effective prior to that date is if the plan is AMENDED to make it so.

Holland's position is like saying a DB plan's 1% FAP x Y/S benefit formula is not definitely determinable because the plan COULD be amended by 12/31 to increase it to 1.25% FAP.

[RTK]

If I recall, and for whatever it is worth, the consensus of the attorneys, actuaries and consultants with whom I discussed Rev. Rul. 2001-62 when first issued was that an amendment would be required to comply with the Rev. Rul. only if the plan specifically referred to the applicable mortality table under Rev. Rul. 95-6 (although those who may have heard of Jim Holland's opinion may have changed their minds).

In any case, if the IRS's position is that all defined benefit plans will fail to provide definitely determinable benefits unless amended to reference the specific applicable mortality table that is to be used during 2002, this position should be set forth in public guidance or a ruling (rather than in unofficial guidance from one or more sources that may or may not in agreement).

[IRC401]

A plan sponsor should be able to make a good faith plan amendment based on a common sense reading of the Rev. Rul. without trying to deal with unpublished comments by Jim Holland.

I seem to recall that several years ago he raised a definitely determinable issue with regard to QNECs and was ridiculed for it.

Holland spent the period between 1994 and 2000 nitpicking over the GATT transistion rules. I assume that this is his new nitpick.

[Guest jgrenier]

I was wondering if anyone had attended the ASPA conference last week in Washington D.C. and what, if anything, the IRS said about the issues raised in this thread regarding 204(h), etc. Also, mention has been made that Jim Holland has expressed his views on this and I was wondering when and where his views were expressed. Thanks.

[MGB]

The two places I am aware of Holland previously speaking on this issue are at an ABA meeting a couple months ago (I think it was out west somewhere) and the Mid-Atlantic Actuarial Club meeting a few weeks ago in Anapolis. Follow-ups of personal calls were made after the MAAC meeting to confirm what he said.

[Guest CRC02]

FYI, this IRS/Treasury Q&A from the May '02 ABA Tax Section meeting was posted on the ABA's website this week:

19. §411(d)(6) – Anti-cutback Rule

Rev. Rul. 2001-62 provides a new mortality table for use under §417(e). The holding indicates that “a plan amendment will not violate §411(d)(6)(B) and the corresponding provision of ERISA

solely because of a reduction in any annuity distribution with an annuity starting date on or after the later of the adoption date or the effective date of this amendment if the cause of such reduction is the substitution of the table in this revenue ruling for the table in Rev. Rul. 95-6.” Does this provision apply for purposes of determining annuity benefits under cash balance

defined benefit plans?

Proposed response: Yes, the relief extends to the determination of any annuity benefit under any type of defined benefit plan. A cash balance or other hybrid defined benefit plan can adopt

the new mortality table for determining annuity benefits without providing a grandfathered minimum annuity benefit.

IRS response: The IRS agrees with the proposed response.

[Guest jgrenier]

Dick Wickersham said today (ALI-ABA conference) that there would be guidance issued soon regarding the 204(h) issue pertaining to the mortality table change for cash balance plans. He said that the Service is aware of the November 16th deadline, that they have not opined yet regarding their views, that they are trying to reconcile "opposing views" within the Service, and would definitely seek to issue something in time for people to act. He did not indicate in anyway how the Service would come out on this issue.

[MGB]

Jim Holland said pretty much the same thing as Wick earlier this week at the Conference of Consulting Actuaries meeting. He also pulled back on his stance about always needing an amendment to specify the effective date. He now claims that if you did nothing and have a reference to the applicable mortality table, you would automatically have a 12/31/02 effective date. Once you are past that issue, then these referenced plans don't have an amendment triggering all of the other problems.

[MGB]

Don't send out those 204(h) notices yet....

The IRS is about to issue a notice (later today or early next week) that no grandfathering (the 411(d)(6) issues) nor 204(h) notice needs to be given.

This will be true whether or not you need to amend your plan.

They are relying on some old GATT guidance that stated that any future changes in the mortality table would not cause 411(d)(6) cutback issues.

[KJohnson]

Posted on the IRS website today. Here is the link

http://www.irs.gov/retirement/article/0,,i...=102884,00.html

Relationship between Revenue Ruling 2001-62 and Cash Balance Pension Plans

Revenue Ruling 2001-62, 2001-53 I.R.B. 632 describes a new mortality table applicable under section 417(e)(3) of the Internal Revenue Code for determining the present value of plan benefits on or after December 31, 2002. The revenue ruling allows the new table to be incorporated by reference (by referring to the mortality table in Rev. Rul. 2001-62). The revenue ruling also provides section 411(d)(6) relief for an amendment substituting the new table for the prior table (if any resulting reduction is not applicable to benefits paid before the later of the effective date or the adoption date of the amendment). Please refer to section 767(d)(2) of the Retirement Protection Act of 1994 for additional information.

Question:

What is the effect of section 411(d)(6) of the Code, section 4980F of the Code, and section 204(h) of ERISA where there is an adoption of the table described in Revenue Ruling 2001-62 under a cash balance pension plan?

Answer:

It is the Service's position that an amendment to a cash balance pension plan adopting the new table as described in Rev. Rul. 2001-62 would not violate section 411(d)(6) and that advance notice to participants is not required under a good faith interpretation of section 204(h) of ERISA and section 4980F of the Code.