Social Security Level Income and 417(e)

[Guest Phil]

My understanding is that Q&A 22 from the 1996 Grey Book, which stated that the SSLI annuity option WAS subject to the 417(e) minimum benefit rules, continues to represent the IRS's position. That is, the SSLI option IS considered to be a decreasing annuity and is not exempted in the recently released 417(e) regulations as a Social Security supplement. I am having a hard time convincing my client's actuary of this fact even though he attended the same EA meeting as I did. He states that he has had informal discussions with the IRS and contends that an SSLI option meets the "spirit" of the regulations' exemption. What discussions have you had regarding this topic? Are you aware of anything published that would support your position?

[This message has been edited by Phil (edited 10-07-98).]

[Guest Harry O]

Phil,

Could you describe more fully how the SSLI works? I've seen different types and I am never sure just what "animal" we are taking about when social security leveling options are discussed.

Thanks.

[Guest Phil]

Under the SSLI option, the life annuity payable to an early retiree is actuarially reduced to pay for a temporary life annuity payable from the early retirement age until age 65. For example, let's assume for an age 55 year old that the value of $1.00 per month for life is equivalent to $1.60 per month payble to age 65. Let's also assume that this age 55 year old had an estimated Social Security benefit payable at age 65 of $800 per month. If the life only early retirement benefit was $2000 per month, the SSLI option would be $2300 per month paid until age 65, reducing to $1500 per month at age 65. (Note that $800/1.6=$500, $2000-$500+$800=$2300, and $2000-$500=$1500). I hope this helps.

[Guest Harry O]

Phil,

We have a similar benefit in our DB plan. I agree that the language in the regulations (and preamble)could be clearer. However, our outside actuaries determined that the SSLI option was substantially equivalent to a social security supplement and thus exempt from the 417(e) rates.

I'd be interested in your views as to why this benefit wouldn't be considered akin to a "social security supplement" -- i.e., a temporary benefit intended to provide a "bridge" until the retiree is eligible for social security benefits . . .

[Guest Phil]

I think Q&A #22 from the 1996 Enrolled Actuaries Meetings' "Grey Book" defines the IRS' position the best:

"Is a Social Security level income option subject to section 417(e)(3)? How is such an option different from a Social Security supplement, which is specifically exempted from section 417(e)(3)?

"RESPONSE

Under current guidance, the Social Security level income option is subject to section 417(e)(3). A leveling option can, in some cases, result in a temporary annuity payable for a very short period of time -- approaching a lump sum. The pattern of payment in these cases is different from the distribution form exempted from 417(e)(3). The exempted form provides nondecreasing annuity payments for the life of the participant which are increased temporarily by the payment of a Social Security supplement."

Indeed, since my client does not offer a lump sum option, this form is the most fequently elected option for single retirees. Also, for terminated vested participants where the early retirement benefit has a relatively small value versus the estimated Social Security benefit, only a temporary annuity is a result (e.g., if the early retirement benefit at 55 was only $500, the retiree would get $800 until age 65 and $0 thereafter.) This, I believe, is what the IRS was alluding to when it stated the the SSLI option was "approaching a lump sum."

My understanding is that the IRS has NOT changed its position on this. But I would love to hear differently!

[david rigby]

Interesting. But I'm unclear about why you think this is a problem. We have a few plans that include a SSLI option. Why is it a problem to be subject to 417(e)?

[Wessex]

Have you been calculating your SSLI option using an interest rate that does not exceed the PBGC or GATT interest rates, and if the GATT rates are in effect for the plan, the mandated mortality table? If not, there is a problem. Most SSLI options that I have seen were using the general interest rate and mortality table applicable under the plan to calculation of annuity equivalencies.