Grandfathering Actuarial Equivalence

[David MacLennan]

If actuarial equivalence assumptions in the plan document are amended, what is the proper way to grandfather the lump-sum benefit? Here are two approaches (assume 12/31/02 as the amendment adoption/effective date):

1) Absolute dollar: Future lump sum cannot be less than the PVAB as of 12/31/02 of the 12/31/02 AB under the old A.E. assumptions.

2) With interest: Future lump sum as of any future date cannot be less than PVAB of the 12/31/02 AB under the old A.E. assumptions.

I always thought #2 was the correct approach, but it never hurts to revisit.

Now, I have a takeover plan where the plan A.E. is defined (prior to GUST restatement) to be 8% pre and GAM83 50/50 as of the Dec preceding the distribution year. 417e assumptions were the usual PBGC interest rates. (I believe this was someone's attempt at early GATT compliance.) Lets ignore 417e for this discussion. Would future lump-sums be grandfathered using the Dec 2001 GATT interest rate for all future calcs, or, would lump sums be grandfathered using whatever Dec interest rate preceded a future year of distribution?

[MGB]

(2) is correct. It is the right to the calculation procedure associated with the accrued benefit that is protected, not the dollar amount at a particular date assuming they terminated at that time.

I think you must grandfather the future interest rates on the accrued benefit.

Note that you can do this as a wearaway. I.e., once you calculate the above in the future, you do not need to add anything to that minimum amount for future accruals. Then compare this minimum to the full accrued benefit using whatever PV factors apply to it.

[david rigby]

....of course with consideration for the exact language of the plan and amendment. The amendment could be more generous than the minimum required by 411(d)(6).

[David MacLennan]

Keeping in mind the Dec 2001 interest rate could be less than future GATT interest rates possibly resulting in much smaller lump-sums, one would still not grandfather just the Dec 2001 interest rate, but rather use for the grandfather calc whatever Dec rate preceded the year of distribution?

This seems to be a kind of "super-grandfathering" from the employer's perspective (if interest rates go down), and lack of grandfathering from the employees' perspective (if interest rates go up).

[Mike Preston]

David, I'm still confused about your first post. Neither 8% or a mortality table would change as of the prior December. Can you clarify that?

What you call super-grandfathering is what the IRS calls wearaway, if I understand you correctly.

[David MacLennan]

The plan's post retirement A.E. interest rate (not 417e stuff), is defined to be the rate as of the Dec prior to the plan year, so it changes every year (sorry that was not made clear). Pre-retirement interest is fixed at 8%. Should these annual changes continue with respect to computing the grandfathered lump-sums?

[Mike Preston]

Yes.