Deductions and CL Interest 2006

[SoCalActuary]

When advising on 2006 deduction limits, we get to use the value of 150% of current liability, reduced by 100% of assets. My question is: what interest rates are allowable in 2006 for this determination?

The law essentially says to continue using the same rules as 2004 and 2005, and the IRS has allowed the use of the old 90% -105% weighted Treasury rates during those years. I am a little uncomfortable that the IRS will hold us to the 90%-100% corporate bond rates.

Anyone think there is definitive guidance on this issue? Any cite?

[AndyH]

It seems to me that the "same rules" language is in the section covering minimum funding standards, whearas the deduction limits language is different. See page 161 of the JCT's "Technical Explanation". This would seem to indicate that the corporate bond rates do apply for 404, not the T Bond rates.

That is the interpretation that my office is using, that for 2006 one CL rate is used for 412 and 404.

[Guest Steve C]

I agree with Andy.

PFEA gave us 404(a)(1)(F), which enabled continued use of the 90%-105% weighted T-bill range for 404. That applied only to the 2004 and 2005 years, and was repealed in section 801(d)(2) of PPA.

Now we should have the same CL rate for 404 and 412.

- Steve

[Guest Jeff Hartmann]

The law essentially says to continue using the same rules as 2004 and 2005

with two notable exceptions:

a. as noted above, the permitted use of 30yr treasury rates for the maximum deduction has been repealed

b. the 415 maximum lump sum cannot exceed 105% of the value using 417(e) rates (in addition to the previous rules)

Now we should have the same CL rate for 404 and 412.

This is the way I normally do it, but I think we may be able to use 5.77% to determine the minimum contribution and 5.19% to determine the maximum contribution (for example, for calendar year plans). I recall IRS giving examples under PFEA where we could use the bottom of the Treasury range for maximums and the top of the corp. bond range for minimums.

[Guest Steve C]

I think we may be able to use 5.77% to determine the minimum contribution and 5.19% to determine the maximum contribution (for example, for calendar year plans). I recall IRS giving examples under PFEA where we could use the bottom of the Treasury range for maximums and the top of the corp. bond range for minimums.

I don't think so, Jeff. I don't have time to look into it at the moment, but thought that IRC 404(a)(1)(F) had sanctioned distinct CL rates for 404 and 412. That section has now been repealed.

[david rigby]

I agree with Steve C's conclusion.