PPA - 411(d)(6)

[Guest Thomas2006]

After the PPA, interest rates for calculating lump-sum payments are changed from the 30 year Treasury rate to rates which reflect the yields on investment grade corporate bonds. If an employer does not want to amend a DB plan for this change (and leaves the 30 year Treasury for purposes of the interest rate calculation), does 411(d)(6) come into play if the employer decides to amend the plan (to change to corporate rates) sometime in the future. There is relief in the PPA from the anti-cutback rule for plan amendments consistent with the provisions of the PPA. However, has anyone looked at this issue (i.e., if you are not amending for the PPA now, but doing so sometime in the future)? Thanks for any suggestions.

[Andy the Actuary]

The employer will need to amend the Plan to adopt the PPA basis as a minimum. At such time, the Plan may specify the pre-PPA basis as the standard basis. If later, the sponsor wants to amend the Plan so that the PPA basis becomes "the" lump sum basis, it would appear the Pre-PPA basis would have to be preserved in respect of benefits accrued as of the change date. So, the Plan would distribute the greater of the lump sum value of the accrued benefit at time of change using the pre-PPA basis or the lump sum of the total accrued benefit using the post-PPA basis. The pre-PPA basis calculation would tend to wear away qucikly for employees continuing to accrued benefits.

[ak2ary]

You have to be careful with retaining the GATT rate for lump sums post-PPA. AT the ASPPA annual conference lat year, and on several occassions since, the IRS has said that you may very well fail the requirement that the QJSA benefit be the most valuable benefit if you do this. The regulations provide that the only exception to the most valuable requirement is if the form is more valuable because of required use of 417(e) rates.

The IRS has stated that if you use a different actuarial equivalence rate for lump sum benefits than for other actuarial equivalence (so that your "reasonable" actuarial equivalence interest rate that is used for showing that other forms of benefits are not more valuable than the QJSA benefit is a greater interest rate than your lump sum rates) and your lump sum rate yields a higher payment than 417(e) you have no protection and likely fail the most valuable requirement.

I don't know of any cases in which this has been enforced, and there are more plans than you think which retained PBGC rates... but I keep hearing warnings getting fired by the IRS