Is there proposed legislation that would increase the interest rate and thus lower lump sum values for DB plan?

[Lori Foresz]

We have a client with a terminated DB plan for which their ERISA attorney has advised us to delay paying out LSs because pending legislation may allow us to pay lower lump sums. The plan just recently terminated, so we still have time to wait (up to a year following the termination date). The plan is underfunded, so any money that can be saved on EE costs will decrease the amount of benefits the owner has to waive.

I have been researching and is the pending legislation the July 2003 bill to replace the 30 year T-Bill rate with a conservative long term bond rate? Is there a phase- in or will we be able to use the new rate immediately.

I am trying to find a commentary on the proposed bill. Does anyone know where I can find it?

Many thanks

[AndyH]

The ERISA attorney is ill-informed. The pending leglislation does nothing for lump sums. The lump sum issue, which some wanted included in the pending legislation but is not, won't be revisited until at least after the election because the issue became a political football.

[Lori Foresz]

Thanks Andy. Then would the pending legisation just change the interest rate for funding purposes not for determining present values? I need to be sure before I ask the ERISA attorney. He tends to dislike anyone questioning him. I will try to research some more. Thanks again.

[AndyH]

yes, that is right.

[WDIK]

I need to be sure before I ask the ERISA attorney. He tends to dislike anyone questioning him.

Although I have no personal experience, I have heard that when you are always right it is annoying to have people question your judgment.

[E as in ERISA]

Doesn't it depend on what he means by "pending legislation"? Are you only talking about HR 3108? Isn't that just a temporary fix? And isn't it very likely that permanent legislation will in fact include provision for rates that would affect lump sums? And, in fact, didn't one or more of the bills introduced last year -- which may technically still be on the table -- address lump sums?

[AndyH]

I happened to have just gone back and re-read ASPA's communications to it's members on this subject. In July 2003, ASPA said that the Bush administration was proposing legislation that would affect 412 (funding) et al and would also change the interest rate using for lump sums beginning in 2005 or 2006. And even that was stripped from the ultimate legislation, so even if something is passed in 2005 it is almost certain to have a phase-in to at least 2006 or 2007 if not later. All the serious proposals from industry groups (Academy of Actuaries for example) were suggesting some sort of delayed effective date.

[E as in ERISA]

But if lgolden is in a debate with someone on this issue, he needs to be aware that there is legislation that may still technically be on the table (e.g., NESTEG?) that includes lump sum rate reform. He needs to instead emphasize the other points you are making: that it will likely have a delayed effective date and/or will not be passed this year.

[AndyH]

Point well taken. I am perhaps overreacting to many recent conversations with people including accountants, bankers, etc. who are reading about the legislation recently passed by the House and Senate and jumping to the wrong conclusion.

[ERISAatty]

At the request of a supervising attorney representing a DB Plan, I am also keeping close watch on the progress of H.R. 3108 - specifically, whether, if/when passed, it would affect Lump Sum calculations.

The way I read the bill as currently written is that the corporate bond index rate that would replace the 30-year bond rate affects only current liability and funding calculations - NOT lump sums.

It's a little confusing, since the bill and commentary occasionally mention lump sums, but other language seems to override that mention.

lgolden, if you're still looking for commentary, check out the Techincal explanation prepared by the Joint Committee on Taxation at http://www.house.gov/jct/x-12-04.pdf

Page 8 of the Technical explanation says that, (if passed), for plan years beginning 2004 or 2005, the interest rate for determinting lump sums must not be less than the greater of: 5.5% OR the interest rate specified in the plan.

BUT, page 10 provides (as does Section 2©(3) of the bill in current form), that amounts payable, including lump sums, may NOT, solely because of the new law, be less than the amounts that would have been payable if the law hadn't been passed.

So, I'm telling my supervisor that lump sums are NOT affected by H.R. 3108. (i.e. they can still be paid out as previously calculated, even if the bill passes). Board users, feel free to correct me if I'm way off here.

Anyone interested in keeping close tabs on developments (the bill is currently in Committee, but no action has been taken since Feb. 12), can go to: http://thomas.loc.gov/

Type: H.R. 3108 into the "Bill Number" box on upper left. On the resulting screen, click any of the links associated with the bill. On the next resulting screen, click "Bill Summary and Status." There, you can see if any changes have taken place.