PPA and Lump sums

[Guest SVP]

We're into October and PPA's effective date is just around the corner. We don't have a segmented yeild curve or a mortality table published for determining lump sums and other 417(e) forms of payment. Delaying implementation of the PPA basis does not seem like a great option due to the potential issues with grandfathering the GATT/GAR basis (loss of relief from 411(d)(6)) and issues with the QJSA possibly not being the most value form.

What are sponsors planning to do about lump sum payments? Some participants need to made elections pretty soon if they are going to take thier lump sum in 2007 rather than 2008. Systems need to be modified and that takes time and time is getting shorter every day.

And what about lookback and stability? Any sense that they will continue to apply to PPA rates? Any ides, hints, or just plain rumors as to when rates for PPA will be published?

[Andy the Actuary]

We have discussed the effect ultimately PPA will have on lump sums and employers are making, but waiting to implement, lump sum decisions based upon generalities rather than specifically in respect of 2008. Most of the plans I service provide for the plan year stability period and 5 month lookback so we can plan for next years' distributions, which is especially valuable when terminating a plan. I explain to my clients that life has changed and actuaries no longer can make pension projections with any degree of confidence. Then, they ask all of the questions you posed at which time I say "I don't know" and offer my appreciation if they would shoot the messinger.

[Guest spangbu1@nycap.rr.com]

Waiting for specifics before implementing PPA may create issues. If the plan continues to pay lump sums on a GATT/GAR basis into 2008 its possible that they may be creating a situation where when they do amend to the PPA basis they will have to grandfather. They mayl no longer have relief from 411(d)(6) unless the gov't extends that relief. I have also read in another post that there may be an issue with the QJSA being the most valuable since the lump sum is not being determined on a 417(e) basis.

I'm curious about what others are doing in the face of this uncertainty in "good faith" to be compliant? Might payment of lump sums need to be curtailed until rates and guidence comes out? Or is there a general sense of optimism that rates and guidence are coming soon and we'll know what to tell clients and their participants?

[Guest lerieleech]

If I heard correctly during Tuesday's ASPPA webcast, regs are supposed to be coming out within the next few weeks.

[Guest SVP]

Was that indication of forthcoming regs from a government representative? Did that indication apply publishing interest rates as well as regulatory guidence?

Thanks for any insights!

[FAPInJax]

Yes, they mentioned coming out with the yield curve data (possibly as early as next week).

[12AX7]

Are plans subject to the AFTAP certification after a plan termination date? It seems that plans frozen after 09/01/2005 would be subject to the AFTAP calculation.

[Guest SVP]

Was the yeild curve for funding (430) or lump sums (417) or both?

What's the sense - will the PPA rates for 417 go back to August 2007 for the earliest possible look back month under the current regs?

Any conjecture???

[Guest lerieleech]

Was the yeild curve for funding (430) or lump sums (417) or both?

What's the sense - will the PPA rates for 417 go back to August 2007 for the earliest possible look back month under the current regs?

Any conjecture???

First, it was Marty Pippins.

Second, from what I heard, lump sums were specifically mentioned, although (and I am saying this) that doesn't mean funding won't be included.

I don't have any conjectures about your final question.

[SoCalActuary]

Well, Notice 2007-81 is now here. So start studying the 3 tier rates. You now have guidance.

[Guest SVP]

The rates are out!!!! That's the good news. Now we really need the MORTALITY TABLE!!!

Based on looking at some lump sum factors for blended PPA rates (20% PPA and 80% 30 year treasury) and GAR94 mortality for participants age 55 and over the decrease in the lump sum is somewhere around 2% to 5%. If the mortality table perscribed for lump sums reflects a mortality improvment of something equivalent to a 1 or 2 year age set back the gap between the old and the new basis could be closed. Is it possible that the new PPA basis could produce larger lump sums?

For anyone looking at this already are you seeing the same thing??

So now let me start asking - has anyone heard when the mortality table is coming out???????

[Mike Preston]

I don't expect the mortality table published with the proposed regs under 430 to change, do you? But that is solely for funding and it looks like you are looking for the 417(e) mortality table. Are we convinced that it is going to be something different than 94GAR? If so, is it likely to be anything other than a unisex version (qxf/2+qxm/2) of the combined table as published in the proposed regs under 430? In any event, I've obliterated my prior content where I babble on about segment rates incoherently (well, not really, but you get my drift).

Essentially, I find it hard to believe that the 417(e) rates will have any applicability in the vast majority of plans, starting as soon as the new rules become even partially effective. Since I believe that the annuity stream will almost always generate a significant liability with respect to segment 3 (ok, maybe not "always"), the net result is that Congress has harpooned 417(e). I, like you, eagerly await somebody actually running some numbers, which I will do after the 15th.

[Guest SVP]

The mortality table for 430 is sex distict so can't be used for 417(e) benefit payments like lump sums. Will the table continue to be GAR94 blended or will it be a blend of the 430 sex distict tables which I think are RP2000 are they not? Will it be a 50/50 blend if it is?

Treasury was looking for public comment and the comment period closed 8/28/07.

Any conjecture?

[david rigby]

Mike's conjecture is a good one, and consistent with the goal of bringing the various interest and mortality bases in line: use the arithmetic average of the q's from the IRC430 table.

But, we are dealing with the government here: common sense does not always rule.

[Mike Preston]

I've substantially modified my post in:

http://benefitslink.com/boards/index.php?s...mp;#entry154180

effectively saying that 417(e) is essentially dead.

[Guest SVP]

I'm not following - why would 417(e) be dead? That's the basis for a lump sum conversion and there are still a few traditional plans out there where the minimum lump sum is relevant. For immediate lump sums the 1st and 2nd segments play a signifigant factor in the calculation.

The difference between what would have been the lump sum on the 30 year treasury rate and the 20% weighted PPA rates does not appear to be very big. The lump sum is a little smaller at age 65. The difference increases as the deferral period increases and age decreses as in the case of a deferred lump sum equivalent (if anyone still pays those).

So the mortality table is the next shoe to drop and we are waiting with great aniticipation to see what happens with the lump sum as result. May turn out to be very little at the end of the day - thank you very much congress for all the effort that has had to go into systems development- but there is a lot of handwringing out there amongst some sponsors that have to figure out what to tell thier participants who are trying to decide whether to retire now and take the lump sum in 2007 before the rates change!

[ak2ary]

I have heard rumors that the mortality table will most likely be, as Mike described, the 430 table blended 50/50 m/f to form a unisex table... this would lead to generally higher lump sums

[Mike Preston]

With a third segment rate of 6.66, once the 417(e) rates are fully phased in, it is hard for me to fathom that they will have any impact on lump sums in the majority of plans. Sure, if a plan uses 8% for its actuarial equivalence, 417(e) will always remain relevant. Even in 2008, with a 20% phase in, we are at a low of 5.02 for the first segment rate and a high of 5.28 for the third segment rate. Assuming a 5% actuarial equivalence interest rate, the mortality would have to make up quite a bit for 417(e) to require an uptick, wouldn't it? Again, I don't have time right now to do a complete work up, but assuming a current age of 65 (minimize segment 3 impact) the 417(e) factor is 141.4463 based on the 20% phased-in percentages of the August rates (using estimated mortality of the CL08 blended). The factor using 5%/94GAR (by far the most common actuarial equivalence factors in small plans) is 141.5291. So, plan actuarial equivalence is more expensive. As you retreat in age, the impact of the third segment rate increases and the 417(e) minimum lump sum is even less.

Once we are talking fully phased-in, the age 65 factor would be only 130.029. That is almost a full 9% less than the actuarial equivalence.

[John Feldt ERPA CPC QPA]

Regarding the segments: Two EA's who gave out different interpretations on the use of the segment rates for minimum lump sum payout purposes (suppose the plan rate is 8.00%, so ignore that for this discussion):

Employee Age 25, NRA = 65

1. Calculate the cash at retirement age 65 retirement using the 3rd segment rate, then discount for 40 years at the 3rd segment rate.

2. Calculate the cash at retirement age 65 retirement using the 1st segment rate, then discount for 5 years at the 1st segment rate, further discount for 15 more years at the second segment rate, and 20 more years at the 3rd segment rate.

Did any guidance spell out how they want these used?

[Mike Preston]

Employee Age 25, NRA = 65

1. Calculate the cash at retirement age 65 retirement using the 3rd segment rate, then discount for 40 years at the 3rd segment rate.

This is how I understand it is supposed to be done.

2. Calculate the cash at retirement age 65 retirement using the 1st segment rate, then discount for 5 years at the 1st segment rate, further discount for 15 more years at the second segment rate, and 20 more years at the 3rd segment rate.

Not correct, to the best of my knowledge.

Did any guidance spell out how they want these used?

The way the law is written?

[Guest SVP]

If the annuity is to start in the 3rd segment it is my understanding that the entire calculation is calculated using the 3rd semgent for the PV of payments and discouting to current age.

We are seeing plans that only use the 417(e) basis - no greater of this or that. Just 417(e) basis so plan def of AE not a factor.

[Kevin C]

So, if the example is changed to employee age = 46 and NRA = 65, would it be:

Calculate the present value at NRA with 12 monthly payments discounted at the second segment rate and the remainder of the expected payments discounted at the third segment rate. Then discount back to the distribution date using the second segment rate?

[SoCalActuary]

Kevin C - yes, that is my interpretation also.

But there is still some concern about pre-retirement death benefits. If you use the more complex multi-decrement model, there are events to consider before retirement age, of which death is the most obvious. Do you value the contingent payments for the intermediate period?

[ak2ary]

The IRS has been pretty clear that the 417(e) benefit is the value of the retirement benefit only. That is, you do not have to value any ancillary benefits pre-retirement to determine the minimum lump sum. Thus, for 417(e), you are not valuing the possible intervening payments, even if the plan has a PVAB death benefit.

In fact, you may violate the most valuable benefit rules if you don't apply mortality to all payments in determining your 417(e) benefit

Having said all that, I disagree with Kevin's calc

Calculate the present value at NRA with 12 monthly payments discounted at the second segment rate and the remainder of the expected payments discounted at the third segment rate. Then discount back to the distribution date using the second segment rate?

You do not discount all the payments to the NRA at the applicable rate and then discount to payment date using the rate applicable to NRA, rather, in his example, you would discount the first twelve payments from expected payment date all the way to distribution date at the second segment rate and you would discount all the later payments from expected payment date to the distribution date at the third segment rate

In other words it is the PV as of the distrib date of a temporary life annuity for twelve months starting at age 65 using the second segment for all calcs plus

the PV as of the distrib date of a life annuity at age 66 using the third segment rate for all calcs

both of these PV's appear to require pre-retirement mortality

[Mike Preston]

Tom, are you saying that the IRS has put it in writing somewhere that we have to use pre-retirement mortality when determining the 417(e) lump sum under PPA, effective 1/1/08, even if the actuarial equivalence in the document doesn't provide for pre-retirement mortality? If yes, are they saying that this is what should have been done pre-PPA? There sure aren't many people who have done it that way pre-PPA.

[Guest SVP]

I concur with the lump sum calculation using the 3rd segment rate to discount payments in the 3rd segment back to the date of distribution and not applying the 2nd segment rate at all for payments in the 3rd segment.

I don't know about pre-retirement mortality. Interesting issue but all the plans I see have a pre-retirement mortality decrement (which will now be prescribed by the IRS) so I don't know how you could determine a lump sum under 417(e) without a pretirement mortality decrement.

Thoughts?

[Kevin C]

You do not discount all the payments to the NRA at the applicable rate and then discount to payment date using the rate applicable to NRA, rather, in his example, you would discount the first twelve payments from expected payment date all the way to distribution date at the second segment rate and you would discount all the later payments from expected payment date to the distribution date at the third segment rate

In other words it is the PV as of the distrib date of a temporary life annuity for twelve months starting at age 65 using the second segment for all calcs plus

the PV as of the distrib date of a life annuity at age 66 using the third segment rate for all calcs

both of these PV's appear to require pre-retirement mortality

Thanks, that makes sense. (I'm not an EA, I just want to get a handle on how the new LS calculation will work.) I was starting to think the LS value would jump significantly when you went from age 45 to 45 + 1 month or age 60 to 60 + 1 month. Now I see that it doesn't.

[ak2ary]

Tom, are you saying that the IRS has put it in writing somewhere that we have to use pre-retirement mortality when determining the 417(e) lump sum under PPA, effective 1/1/08, even if the actuarial equivalence in the document doesn't provide for pre-retirement mortality? If yes, are they saying that this is what should have been done pre-PPA? There sure aren't many people who have done it that way pre-PPA.

Holland Wickersham Pippins and probably others have all said at EA conferences that I attended that 417(e) includes a mortality discount pre-retirement, regardless of the plan's pre-retirement death benefit. They have also said that you didn't "have to" use mortality because using interest only would yield a higher result and the 417(e) result is a minimum. Of course that was before the reg relief for most valuable benefits only applied to increases required under 417e....I am checking the grey book to see if it is in writing and will see if there is a similar way to search ASPPA QA questions (ie Ask Larry Starr or Tom Poje)...

Its interesting that you refer to the plan doc rather than the death benefit. The rules compare the results of the 417(e) calc to the results of the plan rates, The fact that the plan has a zero "q" for all pre 65 ages in its actuarial equivalence shouldn't change its 417(e) result, to my knowledge. However if for 417 purposes the plan says that if the form of benefit is a form subject to 417 that the result will be no less than if the applicable mortality table and applicable interest rates replaced the interest and mortality table in the actuarial equiv section, then there is prolly an arguement that the plan requires the no-mortality 417(e) calc, but that woulfd be a plan requirement not a 417e requirement

Assume two plans identical except that plan 1 has actuarial equivalence of 5% interest; post ret mortality 1983 Iam; pre-ret mortality none

Plan 2 has a table of conversion factors for all forms at all possible ages based on the identical assumptions.... The 417(e) benefit for these two plans has to be the same....doesn't it???

The QA at ASPPA annual will address the most valuable question and, as a follow up, I will ask this specific question. Most of my small plans do not apply mortality in the 417(e) calc and are specifically written that way and I am concerned that they will (or do) have most valuable benefit issues.

Anyway to answer your questions...I'll try to find it in writing, but have heard them say it many times

Not a PPA issue...they've said it for years

[Guest SVP]

Anybody heard anything about when the mortality table for 417(e) is coming out? We are in a position right now where lump sum benefits are to be calculated on sex distinct mortality. That can't be done!! But participants are well into the "red zone" for retirement elections and are supposed to be getting notices about their benefit amounts. But what are we supposed to be telling them about lump sums in 2008???

Can this situation continue much longer? We finally have interest rates but need the mortality table.

Does anyone think that congress can and will provide for an extension? Some say it's too late for them to act and Treasury can't extend the 1/1/08 effective date it on their own.

I can't be the only one out here on BL who is worrying about this am I?

Are there any fellow worriers who can share that they are concerned about this lack of guidence too?

[AndyH]

Tom, are you saying that the IRS has put it in writing somewhere that we have to use pre-retirement mortality when determining the 417(e) lump sum under PPA, effective 1/1/08, even if the actuarial equivalence in the document doesn't provide for pre-retirement mortality? If yes, are they saying that this is what should have been done pre-PPA? There sure aren't many people who have done it that way pre-PPA.

Holland Wickersham Pippins and probably others have all said at EA conferences that I attended that 417(e) includes a mortality discount pre-retirement, regardless of the plan's pre-retirement death benefit. They have also said that you didn't "have to" use mortality because using interest only would yield a higher result and the 417(e) result is a minimum. Of course that was before the reg relief for most valuable benefits only applied to increases required under 417e....I am checking the grey book to see if it is in writing and will see if there is a similar way to search ASPPA QA questions (ie Ask Larry Starr or Tom Poje)...

Its interesting that you refer to the plan doc rather than the death benefit. The rules compare the results of the 417(e) calc to the results of the plan rates, The fact that the plan has a zero "q" for all pre 65 ages in its actuarial equivalence shouldn't change its 417(e) result, to my knowledge. However if for 417 purposes the plan says that if the form of benefit is a form subject to 417 that the result will be no less than if the applicable mortality table and applicable interest rates replaced the interest and mortality table in the actuarial equiv section, then there is prolly an arguement that the plan requires the no-mortality 417(e) calc, but that woulfd be a plan requirement not a 417e requirement

Assume two plans identical except that plan 1 has actuarial equivalence of 5% interest; post ret mortality 1983 Iam; pre-ret mortality none

Plan 2 has a table of conversion factors for all forms at all possible ages based on the identical assumptions.... The 417(e) benefit for these two plans has to be the same....doesn't it???

The QA at ASPPA annual will address the most valuable question and, as a follow up, I will ask this specific question. Most of my small plans do not apply mortality in the 417(e) calc and are specifically written that way and I am concerned that they will (or do) have most valuable benefit issues.

Anyway to answer your questions...I'll try to find it in writing, but have heard them say it many times

Not a PPA issue...they've said it for years

Tom, what are you referring to by "the reg relief for most valuable benefits only applied to increases required under 417".

Are you referencing the (at least to me) elusive TAM of last year? Or something else?

[ak2ary]

Tom, what are you referring to by "the reg relief for most valuable benefits only applied to increases required under 417".

Are you referencing the (at least to me) elusive TAM of last year? Or something else?

1.401(a)-20 Q&A 16

Q–16: Can a plan provide a benefit form more valuable than the QJSA and if a plan offers more than one annuity option satisfying the requirements of a QJSA, is spousal consent required when the participant chooses among the various forms?

A–16: In the case of an unmarried participant, the QJSA may be less valuable than other optional forms of benefit payable under the plan. In the case of a married participant, the QJSA must be at least as valuable as any other optional form of benefit payable under the plan at the same time. Thus, if a plan has two joint and survivor annuities that would satisfy the requirements for a QJSA, but one has a greater actuarial value than the other, the more valuable joint and survivor annuity is the QJSA. If there are two or more actuarially equivalent joint and survivor annuities that satisfy the requirements for a QJSA, the plan must designate which one is the QJSA and, therefore, the automatic form of benefit payment. A plan, however, may allow a participant to elect out of such a QJSA, without spousal consent, in favor of another actuarially equivalent joint and survivor annuity that satisfies the QJSA conditions. Such an election is not subject to the requirement that it be made within the 90-day period before the annuity starting date. For example, if a plan designates a joint and 100% survivor annuity as the QJSA and also offers an actuarially equivalent joint and 50% survivor annuity that would satisfy the requirements of a QJSA, the participant may elect the joint and 50% survivor annuity without spousal consent. The participant, however, does need spousal consent to elect a joint and survivor annuity that was not actuarially equivalent to the automatic QJSA. A plan does not fail to satisfy the requirements of this Q&A–16 merely because the amount payable under an optional form of benefit that is subject to the minimum present value requirement of section 417(e)(3) is calculated using the applicable interest rate (and, for periods when required, the applicable mortality table) under section 417(e)(3).

[tymesup]

Anybody heard anything about when the mortality table for 417(e) is coming out? We are in a position right now where lump sum benefits are to be calculated on sex distinct mortality. That can't be done!! But participants are well into the "red zone" for retirement elections and are supposed to be getting notices about their benefit amounts. But what are we supposed to be telling them about lump sums in 2008???

...

I think it was Norris and Manhart that brought us gender neutral mortality. Now that we have relative value disclosure, we are misleading participants by using neutral tables. I suppose it's even worse when we get spouses of the same gender for J&S benefits.

[abanky]

was there guidance published on how to calculate the min. lump sum? I can't find it in all the piles of stuff i have around my cube

[Guest SVP]

Guidence on the interest rate has come out in Notices 2007-81 and 82 and other than that all we have to go on is the law, the conference report and any discussions at meetings and conferences or here on Benefits Link.

We don't have the mortality table yet, we don't know if lookback and stability continue to apply and we don't have clarity on the tranistion period for phasing in the interest rate. A sentence in Notice 2007-81 has people questioning whether it's ambiguous wording or a change of thinking - it could be read that the PPA rates are to be blended with the applicable rate for 2007 which for many plans would be 30 year Treasury rate from 2006 and that's fixed for purposes of blending with the PPA rates during the transition. I don't happen to think that's what was intended and that's not what we were thinking of doing but the words could be read that way. So the guidence gives with one hand and takes away with the other!

And why are the rates preblended? It's pretty bacis math so was it intended to helpful or is there something else going on. For non-calendar year plans the preblended rates in the Notice won't work unless there is guidence coming that alters something. Sure the unblended rates are there but the blended rates are called ou in a box. We were thinking that the lookback month and stabilty period would continue to apply however, the way the notices are written where the rates that are called out in the box are the blended rates now we are wondering if the gov't is thinking something different.

It's not going to take much of a mortality improvement to make the lump sums under the PPA basis in 2008 bigger than the GATT/GAR basis. Is everyone prepared if the new minimum lump sum turns out to be bigger?

And what if the PPA lump sums are smaller but the plan continues to pay out the higher amount on the GATT/GAR basis - does the plan now have to grandfather that basis when adopting PPA?

What are people telling participants about the distributions in 2008? Can we tell them anything that is helpful?

[Guest mrsactuary]

Guidence on the interest rate has come out in Notices 2007-81 and 82 and other than that all we have to go on is the law, the conference report and any discussions at meetings and conferences or here on Benefits Link.

We don't have the mortality table yet, we don't know if lookback and stability continue to apply and we don't have clarity on the tranistion period for phasing in the interest rate. A sentence in Notice 2007-81 has people questioning whether it's ambiguous wording or a change of thinking - it could be read that the PPA rates are to be blended with the applicable rate for 2007 which for many plans would be 30 year Treasury rate from 2006 and that's fixed for purposes of blending with the PPA rates during the transition. I don't happen to think that's what was intended and that's not what we were thinking of doing but the words could be read that way. So the guidence gives with one hand and takes away with the other!

And why are the rates preblended? It's pretty bacis math so was it intended to helpful or is there something else going on. For non-calendar year plans the preblended rates in the Notice won't work unless there is guidence coming that alters something. Sure the unblended rates are there but the blended rates are called ou in a box. We were thinking that the lookback month and stabilty period would continue to apply however, the way the notices are written where the rates that are called out in the box are the blended rates now we are wondering if the gov't is thinking something different.

It's not going to take much of a mortality improvement to make the lump sums under the PPA basis in 2008 bigger than the GATT/GAR basis. Is everyone prepared if the new minimum lump sum turns out to be bigger?

And what if the PPA lump sums are smaller but the plan continues to pay out the higher amount on the GATT/GAR basis - does the plan now have to grandfather that basis when adopting PPA?

What are people telling participants about the distributions in 2008? Can we tell them anything that is helpful?

Calculations that I did for January 2008 gave a lumpsum as per new PPA rules that is lower than the lump sum under old GATT rules- does the minimum GATT benefit have to be paid out? Or can we stick to PPA lump sum?

[Guest SVP]

It's my understanding that the PPA basis can replace the prior GATT basis and that PPA has provided that you can you this without worrying about 411(d)(6) anti cutback rules. So to answer your question in general the PPA based l/s calc replaces the GATT based l/s calc. However the relief for anti cutback only applies if the basis before was GATT and the new basis is PPA - that is the change is from 417(e) to 417(e). If there are any minimums or something that makes the lump sum calc something other than on a 417(e) basis you can still swap out the GATT calc for the PPA calc just preserving whatever minimum you had before. That's they way I understand this to work.

[ak2ary]

I think that what SVPdescribes is the minimum relief expected from the PPA/GATT change. The question remains, however, about whether the IRS will extend the relief further than that. In early October, your client requested a QJSA notice for a participant who retired and wanted to commence benefits in 2008. So, to fulfill the request, the lumpsum was calc'd based on GATT rates. If the plan changes from GATT to PPA, the lump sum will be less than the QJSA notice described. The employer wants to continue GATT lump sums for those who already got the notices and then switch to PPA.

Does this create a protected benefit because the employer retained GATT past the PPA effective date. Is there 411(d)(6) relief for that? Treasury has indicated there will be some transition relief, but hasnt described it.

Also switching from GATT to PPA reduces benefits. Does the plan have to have the amendment in place before it starts paying people under the PPA rates (unless the plan simply references 417(e))? This may be a serious issue, cuz even if the IRS says it wont disqualify your plan, it should be fun to explain to a judge how the plan paid a lower benefit than the written plan provides.