Deficit Reduction Contribution

[Rolf Trautmann]

In determining the Deficit Reduction Contribution for a January 1, 2003 valuation of a defined benefit plan, what mortality table is used to determine the DRC Current Liability using GATT assumptions? We know that the '94 GAR Mortality Table replaces GAM83 for determining lump sums, but can't determine whether the mortality table change also applies to the DRC calculation.

Thank you for your help.

Rolf Trautmann

[MGB]

The tables to use are governed by different sections of the Code and are not linked. The 417(e) table for lump sums automatically changes from time to time whenever the table for valuing group annuities for insurance companies changes for tax purposes (called the commissioner's standard table under Section 807 of the Code). Whenever that changes (usually about every five years), the new mortality table to be used is prescribed by the group annuity usage.

The 412(l) table for current liability only changes when the IRS decides to do it, there is no automatic change. They may or may not change it soon. They have been dragging their feet on it. (I also would not call the assumptions "GATT" assumptions - they have changed since that law.)

Having said that, note that the IRS gave a very strange answer in this year's EA Gray Book. They say that the current liability override to the lump sum assumption only applies to the interest rate, not the mortality table (although there is no reasoning why this is so under the law). So, for an assumption for taking a lump sum, the post-decrement mortality table would be the 417(e) table (or whatever the plan uses if it produces a larger lump sum), even though it is a current liability calculation.

[david rigby]

For those who are interested, here is the referenced Q&A 4 from the 2003 Gray Book:

QUESTION 4

Funding: Application of Notice 90-11 to RPA ’94 Current Liability

When calculating current liability, Notice 90-11 requires the use of a qualifying current liability interest rate for purposes of calculating benefits in a form other than a non-decreasing life annuity. For example, assume a plan allows lump sum payments and the valuation assumes that participants take a lump sum upon retirement. For purposes of calculating the current liability the lump sum must be determined using the current liability interest rate – regardless of the rate specified in the plan for converting the plan’s annuity benefit into a lump sum.

RPA ’94 added a required mortality table to the current liability calculations – currently the 1983 GAM male and female tables. For purposes of calculating the RPA ’94 current liability, must this required mortality table be used to determine the benefit in a form other than a non-decreasing life annuity? In the example above, would the lump sum valued in the RPA ’94 current liability be calculated using the current liability interest rate and the sex-distinct 1983 GAM table?

RESPONSE

No. The interest rate requirement in Notice 90-11 does not extend to the required mortality assumption, so that the lump sum valued in the RPA ’94 current liability should be based on the mortality table specified in the plan to convert the annuity benefit into a lump sum. Thus, the 417(e) unisex mortality table must be used for this purpose.

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