Relative Value

[zimbo]

We are working on a typical small plan that offers actuarially equivalent annuity options along with a lump sum option that is subject to 417(e). In determining relative value, it seems clear that the annuity options are all 100% of the QJSA option using plan actuarial equivalence. However in determining the relative value for the lump sum, do you (1) take the lump sum value determined at 417(e) rates and divide by the lump sum valued at plan act equiv. and make the resulting pct. the relative value, or (2) take the lump sum value determined at 417(e) rates and divide this by the present value of the QJSA at payment date using 417(e) assumptions?

A strict reading of the IRS regs seem to support #2 but I though many practioners were using the approach in #1. Opinions are welcome.

[Effen]

Since no one is responding, I will give it a shot.

I think the only logical answer is #2.

In #1 you aren't really comparing anything to the value of the QJSA. You are just comparing one lump sum to another, and only one of which is actually payable. It’s a meaningless comparison.

You need to compare the value of the lump sum to the value of the QJSA using the same factors.

[zimbo]

Since no one is responding, I will give it a shot.

I think the only logical answer is #2.

In #1 you aren't really comparing anything to the value of the QJSA. You are just comparing one lump sum to another, and only one of which is actually payable. It’s a meaningless comparison.

You need to compare the value of the lump sum to the value of the QJSA using the same factors.

Thanks for your insight. Just want to point out that in #1, I took a shortcut. I was actually comparing the value of the Lump Sum payable at 417(e) rates to the QJSA at plan rates (which is equal to the value of the lump sum at plan rates since all options are actuarially equivalent). Does this point change your opinion in any way or do you still believe that the regs support my approach in #2?

[Effen]

No, I think you are comparing apples (lump sum @ 417(e) rate) to oranges (QJSA @ plan rate). The comparison needs to be on the same basis, otherwise it isn't valid.

I'm not 100% sure, but I believe the Regs state the QJSA needs to be compared to the lump sum using 417(e) rates.

[mwyatt]

Actually had this discussion today with a plan lawyer, and you can compare to the straight life annuity for marrieds, as long as this isn't verboten to married participants. So in a "plain jane" plan (no subsidies), all of this hooplah, including lump sums, boils down to 100%.

[zimbo]

Actually had this discussion today with a plan lawyer, and you can compare to the straight life annuity for marrieds, as long as this isn't verboten to married participants. So in a "plain jane" plan (no subsidies), all of this hooplah, including lump sums, boils down to 100%.

I like your answer for its simplicity and elegance but I still can't buy into it since the actual language of the regulations seems to call for the approach described in #2 from my original posting. Maybe we can ask the IRS at a future EA or ASPPA Meeting.

[Everett Moreland]

See 1.417(a)(3)-1©(2)(iv) and the Age 65 Commencment in 1.417(a)(3)-1(e) Example 3, which states that the relative value of the lump sum is "Approximately the same value as the Life Annuity."

[mwyatt]

Don't have the regs handy, but the key point as far as comparing is that you can use as your basis point the SLA if this is also offered to married participants. Even if you want to go with backing the 417 lump sum to the equivalent QJSA using the 417 interest and mortality assumptions rather than the plan's interest and mortality assumptions, in a flat case unlikely that the 417 QJSA would be radically different (you have a 95-105% window to state that they are approximately the same).

[ak2ary]

#2 is absolutely correct