MVAR

[JAY21]

If anyone went to the Vegas WPBC/ASPPA conference last month, I thought I heard a comment from one of the IRS speakers that the service had come to a decision that in their reviews (I think determination letters) that they needed to be consistent with previous treasury guidance in confirming the QJSA is the most valuable benefit under a pension plan. I'm trying to remember the context of of this statement, assuming I'm even remembering it correctly. Was the context regarding the calculation of the MVAR under general testing ? If so, I assume it would apply to all plans subject to QJSA requirements so maybe we wouldn't need to test the 417(e) GATT subsidy under the MVAR ? just the QJSA subsidy. I could be totally wrong on how I took the comment though so I'd appreciate if anyone can confirm or correct me on this.

[Mike Preston]

Confirmed.

[Blinky the 3-eyed Fish]

Double-dutch confirmed.

[JAY21]

Thanks for the confirmation.

[AndyH]

What is confirmed? That a 417(e) lump sum need not be considered as part of the MVAR calculation? If so, was this authoritative, and is it in print anywhere?

Would anyone elaborate please? Thanks.

[Mike Preston]

Yes. In print. The 401(a)(4) regulations. Quite clear.

[AndyH]

Perhaps I should restate my question because the answer to my question has never been clear before. Has some light been turned on out West?

Here is an example. Three plans with identical census.

Plan A has no lump sum provision. It has no subsidized optional forms of benefits. Any benefits paid early are discounted at 8%.

Plan B is identical except that it offers lump sums that are computed using the 417(e) rate.

Plan C is identical except that it offers lump sums that are computed using the 417(e) rate or a flat rate of 2%, whichever yields the highest result.

Each of these plans are general tested. Assuming the same testing asssumptions and demographics, would the MVARs be the same?

I can tell you that ASPPA sponsored text books say no. I can also say that many ASPPA session speakers say no. I can say that Larry D. used to say no until Jim Holland told him he was wrong.

What would the differences in the MVAR be now?

[Mike Preston]

Too ambiguous a question. Try limiting it a bit. In the first case, the MVAR's will be different depending on whether the interest assumption for a4 purposes is higher, lower or the same as the 8% assumption. In the second, I need to know whether the actuarial equivalence *IS* the 417(e) rate or whether there is an actuarial equivalence provision that turns out to be irrelevant merely because the 417(e) rate always produces a larger benefit. In the third case, it seems pretty clear that the MVAR would be the same whether the 2% was 3%, which may answer your question.

[AndyH]

I will try again.

Plan A and Plan B are identical except that Plan A offers a lump sum subject to 417(e). Benefits are available only at NRA. Testing assumptions are identical to the plan's equivalence assumptions for converting benefits from a normal form of life annuity to a QJSA.

Each plan has one participant. They are identical twins. They make the same money.

Do they have the same MVARS in the general test?

[AndyH]

In the third case, it seems pretty clear that the MVAR would be the same whether the 2% was 3%, which may answer your question

Mike, would you please elaborate? Would you not agree that this is a subsidy subject to inclusion in the MVAR calculation?

What is being "confirmed"?

[JAY21]

MVAR_just_QJSA_per_IRS_comment_at_ASPPA.pdfAndy, I thought it was regarding the testing of the lump sum (including GATT subsidy) on the MVAR. However, it is me asking the question here on benefitslink so obviously I'm not positive. However, I have found the forum the issue was discussed in at the ASPPA Vegas conference, it was the Actuarial Q&A class with Tom Finnegan & George Taylor asking questions to Martin Pippins from the IRS (or is it Treasury ?). Anyway, attached is the Q&A #2 which asks the question under subparagraph "C" and my own brief cryptic hand-written note next to it on the response I heard. I came away with the impression that Marty Pippin said we could treat the QJSA as the most valuable accrual rate for the MVAR purpose and not need to test the 417(e) gatt impact on the lump sum. However, that is the confirmation I am requesting on this board to make sure I heard it correctly. I thought Marty also said the service felt they needed to be consistent in their reviews of the general testing submissisons with other sections of treasury regs that state the QJSA is the most valuable benefit.

[Mike Preston]

I will try again.

Plan A and Plan B are identical except that Plan A offers a lump sum subject to 417(e). Benefits are available only at NRA. Testing assumptions are identical to the plan's equivalence assumptions for converting benefits from a normal form of life annuity to a QJSA.

Each plan has one participant. They are identical twins. They make the same money.

Do they have the same MVARS in the general test?

Maybe. What you haven't defined is what the plan's definition of actuarial equivalence is when the lump sum form is elected. Is it 417(e)? Plan Rate of X% where X is different from testing assumption? Plan Rate of y% where y is the same as the testing assumption? Only in the third case are the MVAR's the same.

[AndyH]

Thanks, Jay, 2© is the question. Who is answering?

Note that this question still could have been misinterpreted because of the "instead of the QJSA" comment.

Some would advocate that the lump sum converted to a sla is the normalized MVAR. That is not true, and that could be the source of the NO response. The lump sum normalized to a QJSA is the correct method, if the lump sum must be considered at all.

So I'd like to know who answered the question and would want further evidence that he/she actually understood the question.

Mike, to answer your followup, I am asking both questions.

1. If the lump sum is based upon a plan fixed rate, is that considered in the MVAR? That is why I used 2% earlier as the plan rate for lump sum purposes. Obviously the testing rate is between 7.50% and 8.50%.

2. If the lump sum is a 417(e) conversion only, what then is the answer?

Joan G and Norm L had an ASPPA textbook (C-4 study guide) example a few years ago which included a plan with a 6% rate for lump sum conversion. It was left unspecified (intentionally ambiguous I think) whether that was a flat plan rate or a 417(e) rate. It did not seem to matter to them. The subsidy between the test rate and the lump sum rate generated the MVAR. I am trying to determine whether this is now untrue in the eyes of the IRS and whether it depends upon whether the lump sum is a plan rate or a 417(e) rate.

I have been asking this question to many people for years, and the responses have been split right down the middle. I thought I had become good at asking the question but I guess not.

Blinky, do you follow my questions?

[Mike Preston]

In the third case, it seems pretty clear that the MVAR would be the same whether the 2% was 3%, which may answer your question

Mike, would you please elaborate? Would you not agree that this is a subsidy subject to inclusion in the MVAR calculation?

What is being "confirmed"?

Bad typo. Should have said "would not be the same if the 2% was 3%". Sorry.

[AndyH]

Thanks, that does help alleviate some of the confusion, but then what was "confirmed"?

[Mike Preston]

This does seem to require a finely targeted question to ensure accuracy, but what was confirmed is that the 417(e) subsidy is ignored when determining MVAR's. This does not mean that any other plan subsidy is ignored, so an actuarial equivalence provision which involves a subsidy upon conversion will impact MVAR's. Usually, of course, the younger the individual the greater the subsidy, so this is rarely a concern in a4 testing, although one can not guarantee it 100%.

The key is in recognizing a plan subsidy versus an ignorable 417(e). There are at least four cases, as far as I can tell:

1) no lump sum, but other forms of benefit are converted using rates which are less than the a4 rates in use. This will cause whatever optional form is available to result in a calculation that will modify the otherwise applicable MVAR's

2) lump sum tied to 417(e) rates, which I prefer to think of as having two rates in the plan: a) the use of a specific rate determined by reference to 417(e) which is the "regular" actuarial equivalence and therefore will give rise to a modified MVAR determination; b) the standard provision which requires the plan to pay the greater of the lump sum under plan rates and 417(e) rates. In this case, of course, (b) has no meaning because it is identical to (a). But (a) exists and creates an MVAR issue.

3) lump sum under terms of plan always more favorable than 417(e) rates, such as your 2% example. Again, going through the logic of (2), now (a) has no impact for two reasons - i) even if it did apply, (b) would be bigger, ii) but it doesn't apply because the 417(e) subsidy is ignored.

4) lump sum under terms of plan may be more or less favorable than 417(e) rates in which case it becomes clear that one merely ignores 417(e) rates and uses the plan's definition of actuarial equivalence for purposes of establishing the MVAR applicable to that benefit.

Clear as mud, right?

[AndyH]

Thanks, it is clear to me. But I have yet to see this clearly and authoritatively stated in print anywhere.

[Blinky the 3-eyed Fish]

A TAM being issued was the cause of this discussion. I don't think it is released yet.

[AndyH]

Thanks. That makes it less of a weird discussion than I thought.

[JAY21]

I believe Blinky is right. I've since found a hand-written note I jotted down during the Vegas conference regarding a "forthcoming" TAM on the issue.

[ak2ary]

I agree with my Mike...before the session we had several discussions with both Marty and Jim Holland regarding this and they were consistentthat a subsidy attributable solely to 417(e) is ignored. You measure the QJSA payable at each age normalized to testing age. Thus, in your 2% example, since (other than 417(e)) no benefit form can have a subsidy more valuable than the QJSA, if the plan provides a 2% reduction for lump sums, it can't provide a greater reduction for QJSA.

[AndyH]

Thanks for the additional comments, but a followup if I may:

Thus, in your 2% example, since (other than 417(e)) no benefit form can have a subsidy more valuable than the QJSA, if the plan provides a 2% reduction for lump sums, it can't provide a greater reduction for QJSA.

Would you clarify this comment please.

Are you saying, that as a condition of qualification, that if a plan has a 7% aeq reduction for early retirement then it cannot have a 6% (or 2% e.g. less than 7%) flat rate for lump sums (in which case the ls is the greater of a 6% calc or a 417(e) calc).

If this is true then the ls would always be ignored if 417(e) is ignored.

Or am I misunderstanding your comment?

[ak2ary]

[in general, it is a qualification requirement that the QJSA benefit be the most valuable benefit under the plan. This means that no benefit form can be subsidized when compared to the QJSA. Thus, other tha for 417(e), if you have a six percent reduction for lump sums you cannot have a 7% reduction for QJSA.

It goes further also. the (a)(4) regs require that the MVAR be determined by normalizing the QJSA payable at each age and picking the greatest, thus, even if it was legal to subsidize the lump sum (as compared to the QJSA) (again, other than 417(e) differences) under 401(a)(4) you would test the QJSA

[AndyH]

Understood, but that (your second paragraph) represents the viewpoint of a small minority of the people that I have spoken to about this. It also contradicts the approach taught by ASPPA-associated actuaries in both conference sessions and textbooks.

I can off hand cite Joan Gucciardi, Norm Levinrad, Carol Sears and Scott Miller to name just 4. (They may have changed their positions for all I know - this is 3-4 year old information). Larry D changed his position on this in the last session I saw him do. He said JH said he was wrong to ignore the lump sum in the MVAR calc.

I don't disagree with your comments, but it seems there are 99 differing interpretations of this.

Something such as a TAM would sure be nice. Thanks for the comments.

[ak2ary]

Once you get to 417(e) being ignored, the question of valuing the lump sum or the QJSA still remains, but really only matters in a combo plan situation. Assume a 5% AE rate

Normalized L-S= QJSA x (5%QJSA-APR at attained age) x (1.085^FS) / (8.5% Life-APR at testing age)

Normalized QJSA = QJSA x (8.5% QJSA-APR at attained age) x (1.085^FS) / (8.5% Life-APR at testing age)

Since the 8.5% APR at attained age is smaller than the 5% APR the resulting MVAR for the QJSA benefit is going to be smaller the the normalized Lump sum, but in a standalone DB the make-up of the rate groups is likely the same.

In a DB/DC combo however, using the QJSA yields a lower MVAR and hence de-values the DB benefits (usually provided to HCEs) versus the DC benefits (usually provided to NHCEs), This allows for greater DB benefits.

As I said, both Jim and Marty have personally told me that you should use the QJSA and "You can't get into trouble if you follow the reg". They are aware that some field offices were questioning the QJSA versus lump sum, and they have looked at the issue. As far as a TAM, it seems to me that it would only mimic what the regs already say

[ak2ary]

BTW- If you go back to ASPA classes I taught 3-4 years ago, I am sure I also taught the lump sum approach

[AndyH]

Back in the old days when it was one P?

And your name is ...?

[ak2ary]

That was when they offered those classes

ASPPA doesn't do them

I think they couldn't afford both the classes and the 2nd P

[AndyH]

Is there anything new on this? Anything at ASPPPPPA? Was a TAM issued?

[Mike Preston]

Yes, the TAM was issued. It is being redacted and will be posted on the COPA website soon, if all goes according to plan.

[AndyH]

Would somebody pullllllleeze post the TAM or provide a number or publication date or something that we can use to find it? I have access to all TAMS through CCH but I still cannot find it.