Legislation re calculation of lump sum benefit

[MarZDoates]

Let me preface this with the fact that I KNOW NOTHING about Defined Benefit plans. I'm a DC kinda gal. I have been asked by a collegue the following question:

"Have you heard about any proposed legislation that would / could change the

way an employer can calculate the lump sum payout from a defined benefit

plan? I have heard some "buzz" about it, but haven't been able to get any real

detail."

Has anyone heard this also? Is there a source I could refer to? Thanks.

[SoCalActuary]

417e covers the minimum distribution rules for DB lump sums. No major changes here in the recent past. The last change was in 2002 with a new mortality table.

PFEA (the law passed in 2004) modified the 415 (maximum benefit) rules. For 2004 and 2005, lump sums for benefits at the 415 maximum amount must use a modified calculation with the 2002 mortality table and 5.5% interest. Naturally, some exceptions apply during 2004.

[WDIK]

I'm a DC kinda gal.

Wasn't that a song by the Andrews Sisters?

[MGB]

Given that the current session of Congress will end in a few weeks following their lame duck session, there really isn't anything on the table. However, there were proposals put forward (e.g., Portman-Cardin III) to replace the reference to 30-yr Treasury bonds with the same long-term corporate bond yield that is being used temporarily for funding purposes (and hoped to become permanent).

This language will be reintroduced soon after Congress reconvenes with a clean slate in January.

AARP will not let such a provision get anywhere (they DO own a few in Congress) without an extraordinarily lengthy phase-in period. E.g., no change for a few years and then graduated change into the new index over another set of years. The two of these time periods together could stretch out eight to ten or more years.

FASB's decisions a couple of weeks ago that the minimum ABO and PBO should be the lump sum value under all plans will put enormous pressure on getting this provision through a lot faster than was contemplated when it was originally proposed. The FASB ABO liabilities will essentially increase 20 to 30% for all plans with lump sums (i.e., discounting at 30-yr Treasury instead of Aa corporate rates). This is going to have a significant impact on additional minimum liability and create a tremendous outcry for legislative action.

[AndyH]

The FASB's rules together with lack of legislative relief have destroyed non-tax shelter DB plans. And of course the perfect storm was central.

This new FAS stuff will just be another nail in the coffin. And I think much of it relates to CPA bias against DB plans which in part relate to not wanting to understand and deal with the FASB's rules.

[Effen]

FASB's decisions a couple of weeks ago that the minimum ABO and PBO should be the lump sum value under all plans will put enormous pressure on getting this provision through a lot faster than was contemplated when it was originally proposed. The FASB ABO liabilities will essentially increase 20 to 30% for all plans with lump sums (i.e., discounting at 30-yr Treasury instead of Aa corporate rates).

MGB, where can I find out more about this?

[david rigby]

This may not answer your question, but it provides some brief background:

Handouts for 10/13/04 Board meeting. See pages 13-14.

http://www.fasb.org/board_handouts/10-13-04.pdf

Minutes from 10/13/04 Board meeting. See pages 5-6.

http://www.fasb.org/board_meeting_minutes/10-13-04_fas87.pdf

And webcast (that just ended):

http://www.soa.org/ccm/content/ce-meetings...cast---content/

[MGB]

Also note the latest updates to the "amendment of SFAS 87 and 35 project" (the FASB is no longer calling this an interpretation of SFAS 87 for cash balance plans).

(When you go to the FASB site in the future, just click on "project activities" on the left and then go down to whatever they are calling this at that time.)

http://www.fasb.org/project/amendment_st87&35.shtml

"Decisions Reached at Last Meeting

...The Board directed the staff to develop an amendment of Statement 87 for all defined benefit plans with lump sum features (that is, plans that allow employees to receive an immediate walk away amount upon separation of employment) so that the pension obligation recorded would be the greater of the undiscounted walk away amount that employees would be entitled to if they separated employment at the measurement date or the actuarial present value of the pension obligation at the measurement date."

[rcline46]

Isn't it strange. When the actuarial community was asked for comments when FAS 87 was being drafted, we told the board that the only valid measurement of the ABO was the termination liability.

Now they are recognizing the fact that we were correct all along.

[mwyatt]

I assume that this ABO would reflect the IRC 417 minimum lump sums for the fiscal year (any clarification as to what period to use as this rate fluctuates at the minimum annually - and for pure geek talk fiscal year v. plan year when they differ)?

[MGB]

I don't know about Rcline's comment if that is what you are referring to.

For the upcoming FASB proposal, the rate will be at the measurement date.

[MarZDoates]

Thank you for all the replies. This help me!!!

[mwyatt]

Any update on the LS proposal? Would this apply to YE 12/31/2004 or this still up in the air w/ FASB?