Permitted Disparity, Non-Standard Interest Rates

[Guest merlin]

1.A plan uses maximum permitted disparity in the benefit formula. The plan's actuarial equivalence factors are 8% pre-retirement, 6.5% 1983 IAM post-retirement. Does the use of 6.5% factor require the plan to be tested under 401a4? I think the answer is yes, but I'd like confirmation.

2.Same plan, same conditions, but the plan document (a Corbel vs) contains the following language as part of the definition of actuarial equivalence:

"Notwithstanding the above, if a benefit is distributed in a form other than a nondecreasing annuity payable for a period not less than the life of the participant.... the interest rate used in determining the Actuarial Equivalent of the portion of the excess/offset portion of the monthly retirement benefit... shall not be less than the lesser of 7.5% or the Applcable Interest Rate".

Does this language eliminate the need for testing with respect to the permitted disparity?

[AndyH]

Why do you think yes to 1? The reduction is greater than 1/15, 1/30th, is it not?

I have no idea what 2 accomplishes.

[Guest merlin]

I'm not sure. I just remember something that David Farber did for ASPA some years ago that calculated an adjustment to the max xs % if the a.e. rates were non-standard.

[AndyH]

I think that makes sense if the reduction for early retirement is less than the 1/15, 1/30 rule would yield, but I don't think the assumptions that you noted do. I have seen documents for integrated plans explicitly stipulate that the integrated reduction is limited to not more than the 1/15, 1/30 reduction would yield, regardless of what actuarial equivalency is defined as for other purposes.

And the assumptions could make an integrated plan a non-safe harbor if the normal form is other than a SLA if the conversion from the normal form to a SLA would violate the permitted disparity limit.

[Guest Doug Goelz]

You typically have to use the normalizing rules of Regulations Section 401(a)(4)-12 to determine if you are exeeding the maximum permitted disparity, for plans that pay benefits in a nonannuity form (see Regulations Section 401(l)-3(b)(4)(iii)©)

As a quick example, assume NRA=65 and benefits could be paid in the form of a lump sum as early as age 21. If the plan's actuarial equivalence was based on 5% interest pre and post 65, then the .65% disparity factor would need to be reduced as follows (using 7.5% as the normalization assumption):

.65% x APR(65) @ 7.5% / APR(65) @ 5.0% x v^(44) @ 7.5% / v^(44) @ 5.0%

If the plan defined actuarial equivalence based on 7.5% pre and post 65, then the ratio of the v's above would cancel out. Similarly, if the plan used a 7.5% post-ret interest assumption, then the ratio of annuity purchase rates (APR) would also cancel out -- and there would be no adjustment to the .65% disparity factor required.

However, Regulations Section 401(l)-3(b)(4)(iii)(E) provides an exception to the otherwise required disparity reduction for plans defining actuarial equivalence as the rates required under sections 401(a)(11) and 417(e). I believe that is why some plans were drafted to simply say that lump sums would only be based on these factors (to get around the normalizing adjustment mentioned above).

I have seen documents drafted the way yours is, and I think you are fine without worrying about the need to normalize the disparity factor.