Brain Cramp on converting prior DB AB for 415 offset

[mwyatt]

Had a proposal roll across my desk in the last couple of days and seem to have lost my train of thought.

1) 1-Man Sponsor, previously maintained a DB plan. Plan was terminated in 1997, distributed LS in 1998 to successor PS plan. Plan at that time had NRA of 60, participant was age 59 at time of distribution. Lump sum received to PS plan in 1998 was 1.078m. AE in old plan was 1983 IAM, all ages setback 4 years, pre-ret i of 7%, post-ret i% of 5%.

2) Looking to establish a new DB plan to take advantage of increased 415 limits. Plan would be effective 1/1/2003, age 64 at start, NRA of age 69 (5 years of part rule for NRA).

What is throwing me for a loop is how to calculate value of prior LS received, as far as assessing a SLA annuity value.

Do I:

- Determine SLA AB based on actuarial equivalence assumptions in effect at time of distribution (looks like GATT played a little into benefit at that time), using LS paid, attained age at distribution, and retirement age under prior plan, and then actuarially increase to new NRA based on prior plan assumptions?

- Determine SLA AB under proposed plan assumptions (say 94GAR @ 5.5%) using attained age at distribution and NRA of 69 under new plan?

Help (trying not to get caught up too much in minutae as far as exact age - principals on nearest age would be fine to get back on track).

[Effen]

Without looking too deep, I vote for option I.

There was a time that the IRS was saying that you should use the AB at the time of termination ignoring the actual value received, but I think they backed off this. I'm pretty sure their current thinking is that you should determine the AB based on the amount received, using the assumptions in effect at that time.

Since that was an AB, payable at age 60, it should be rolled up to the new RA. If they received 1M in '98, I would expect that will eat up most of their 415 limit, even under the new limits.

[Blinky the 3-eyed Fish]

I would ask why you are attempting to assess an SLA value to the lump sum? Ultimately, when the proposed plan is terminated and the participant rolls over the dollars, you will be most concerned that the lump sum payout limit is not exceeded. Thus, I would fund for a lump sum.

So, you have a lump sum value based on the proposed plan's actuarial equivalents and 94 GAR 5% at age 69. You have the 1.078M paid out at age 59 that should be increased with interest 10 years. The net is available to fund.

To me, converting the lump sum to an annuity under the old AE and then subtracting that annuity paid is comparing apples to oranges. You have a lump sum limit under EGTRRA that are all new-law benefits and certainly greater than if any old-law benefits under Rev. Rul. 98-1 if they were considered.

[AndyH]

Blinky, your approach may be ok if the GATT/GAR rate is unchanged since the first distribution, but if rates have increased since the prior distribution, I think that a conversion to a life annuity, then a recalculation, is necessary.

At least that is what the written comments that I have seen say.

[Blinky the 3-eyed Fish]

I do not agree with that approach as it would benefit those that got paid out while the applicable interest rate was lower. Maybe I didn't listen when my mom told me that life wasn't fair, but I prefer the approach that puts people on an equal playing field.

And it's not just that, we are looking at a lump sum limit. To convert a prior lump sum to an annuity and back again using different factors makes no sense. I know that is not the criteria for our decisions in this business, but I would argue to the death, or at least until lunch, against another methodology.

[AndyH]

Then you must really hate doing the MVAR calculation for the general test, particularly with a plan that pays lump sums.

[Effen]

I heard Jim Holland at an EA meeting say that you needed to recognize the AB at the time of payment and roll it forward.

Do you have any basis for your method Blink? You should know that "equality" is a relative word.

[Mike Preston]

There doesn't appear to be specific guidance on this issue, although Tom Finnegan and I have "discussed", at length, whether the principles of 98-1 and 99-44 should apply. However, in a post-GATT environment, if the new document doesn't, in some way, establish an "old-law" benefit, then the approach that Blinky advocates may be all that is available. Then again, maybe not. (g) Unfortunately, in the absence of a PLR, an individual client doesn't seem to be able to get any advance comfort.