CL Interest Rate Selection

[Guest dmdoug]

I'm always curious to see other actuarys' CL assumptions. Most of my plans have stayed at the max end of the range for both RPA and OBRA. I recently came across the following two year set of assumptions which made me wonder whether I am missing some rule about CL rate selection. Calendar year plan:

2001 RPA=6.21, OBRA=6.21

2002 RPA=6.85, OBRA=6.00

My question is why the OBRA rate would not go to the upper range 6.28. 6.00 happens to be 105% of the 4-year ave. on 1/1/02, which was the old RPA upper range max before the JCWAA change. Is there some rule that says the OBRA rate needs to be the same % of the 4-year ave. from year to year? I thought we had complete latitude within the range from one year to the next.

Prehaps OBRA FFL was not a factor for this plan and the actuary felt it was easier to justify staying at 105% if he/she was ever asked about it.

I have seen other changes over two years which have also made me wonder. All of which led me to this post. Thanks.

[Blinky the 3-eyed Fish]

I too have looked that up before. Here is the rule. You might have to break out the code book to follow.

412(l)(7)©(i)(III)

(III) Special Rule For 2002 And 2003.--

For a plan year beginning in 2002 or 2003, notwithstanding subclause (I), in the case that the rate of interest used under subsection (b)(5) exceeds the highest rate permitted under subclause (I), the rate of interest used to determine current liability under this subsection may exceed the rate of interest other wise permitted under subclause (I); except that such rate of interest shall not exceed 120 percent of the weighted average referred to in subsection (b)(5)(B)(ii).

So, under the old range of 90-105% the 105% RPA limit would be 6.00% as of 1/02. Because in your case the OBRA rate of 6% does not exceeds that amount, you cannot have the RPA rate go up to 120% of the range. In other words, in order to have the RPA rate exceed the OBRA rate, the OBRA rate would need to exceed the 105% corridor, or be at least 6.01%.

[david rigby]

Some prior discussion:

http://www.benefitslink.com/boards/index.p...t=0entry78262

[Blinky the 3-eyed Fish]

Pax, but does anyone follow the rule MGB quotes, including Jim Holland?

[david rigby]

Initially, we assumed Blinky's question was purely rhetorical. Upon reflection, I believe it important discussion. MGB offers good comments and summary in the link above. Especially important is his observation that the legislative history (i.e., the committee reports) does not differ from the language of the statute.

(Aside: the Conference Committee Report makes reference to the current liability rate based on a permissible range “…defined as a rate of interest that is not more than 20 percent above or below the average mid-term applicable Federal rate (AFR) for the 3-year period ending on the last day before the beginning of the plan year…”. See page 259 of the CCH guide to the Revenue Act of 1987. As we know, the statute uses a 10% corridor and a 4-year average, and uses Treasury securities rather than the mid –term rate.)

I found nothing on point in the Gray Book, but I agree with MGB’s comment about the interpretation given by Jim Holland and other IRS representatives. It is my opinion that the IRS takes this position because they believe this is what the language should have said, in effect returning some level of discretion to us EAs. It also has the added benefit of taking the IRS out of the loop of trying to police every little thing. (It is possible you have overheard someone complain about the micromanagement that is the IRC.)

What really happens? I couldn’t say. (Think of Harlan Weller when you hear that phrase.) I have no doubt that most EAs strongly believe that a DB plan’s best friend is a strong funded ratio, and the average EA is capable of seeing the big picture.