Integrated DB / Actuarial Eq.

[Guest penman]

I am taking over a integrated DB plan on a prototype doc. The actuarial equivalence interest rate is 6.5%. My understanding is that since that is not within a range of 7.5% to 8.5%, the benefit formula does not qualify for the design based safe harbor exemption to general testing. Am I correct and, if so, where in the Code or Regs is that stated?

[Blinky the 3-eyed Fish]

You are getting some issues confused. The 7.5% - 8.5% interest rate requirement is the range required for general testing. An age-weighted DC plan that converts contributions using a interest rate within this range and a standard mortality table will pass general testing automatically (i.e. a psuedo safe harbor).

However, there is no such requirement for a safe harbor integrated DB plan. Read 401(l).

[AndyH]

Isn't this the old RR 71-446 issue? Payment prior to SSRA must be reduced by 1/15th or more (6.6666%)for 5 years, 1/130th thereafter.

If penman's plan provides for an early retirement reduction of 6.50%, then with mortality the reduction must amount to at least 1/15th per year from SSSRA down. So it is probably ok.

1.401(l)-3(e)

[JAY21]

I think Penman is right, there is any issue there, although I don't remember if it necessarily took it out of the safe-harbor or if it just required an "override" using the interest rates he mentioned (7.5%-8.5%). However, when payable as a lump sum the integrated piece is still subject to 417(e) rates, which does legitimately overide the 7.5-8.5% (without taking it out of safe-harbor), so if the 417(e) rate is lower than the 6.5% then for lump sum purposes it effectively takes care of this issue I believe.

[AndyH]

No, 417(e) is not relevant here; it is specifically exempted under 1.401(l)-3(b)(iii)(E).

[JAY21]

Andy, don't you still have to present value the integrated piece though using 417(e) rates ? or is that the part you are saying is exempt ?

[AndyH]

I think it says you don't have to worry about 417(e) (the use of a rate below 1/15 solely to comply with 417(e) ) causing a violation.

If the plan said the lump sum is the greater of the 417(e) lump sum and the lump sum using 5% GAR, then you would have a violation, because the fixed rate is not at least 6.6666%.

[Guest penman]

Thank you for the responses. Some of the more popular prototype non-standardized integrated adoption agreements will state in the actuarial equivalence section that the interest rate "must be between 7.5% and 8.5%".

[could be me maybe not]

penman, I just looked a series of corbel-based adoption agreements and the integrated standardized and non-standardized both require interest between 7.5 and 8.5%. The non-integrated ones do not.

[Guest penman]

I know. I believe the thinking is that a lump sum cashout at, say 5%, would discriminate in favor of the higher paids, the ones with the biggest excess benefits. I realize the in the current interest rate environment 417(e) makes it a moot point unless someone is at the 415 limit.