Plan amendments for the new 417(e) rules

[John Feldt ERPA CPC QPA]

Suppose a DB plan currently has defined the plan's interest rate and mortality as the GATT applicable rate and mortality. The plan goes on to define the Section 417 interest rates which shall be used as a minimum: the applicable mortality is the commissioner's standard table from Code Section 807(d)(5)(A) and the applicable interest rate from the 30-year Treasury securities as specified by the Commissioner for the lookback month(s) prior to the stability period.

In the 2008 plan year, if the plan is not yet amended for the 417 change from PPA, must the plan compare the lump sum determined by using the old GATT mortality and full 30-year treasury interest rates (the existing terms of the plan), to the lump sum determined from the new required 417(e) blended rates and its new mortality?

Or can we just switch immediately in the 2008 plan year to just use the new blended rates and mortality with any 411(d)(6) worry, even if no amendment is in place describing these new rates and mortality?

[Mike Preston]

No one knows, yet. My guess is that an amendment will be required if you don't want to pay the better of the two rates.

[Andy the Actuary]

If you're terminating a PBGC covered calendar year plan effective 12/31/2007 and you want the PPA lump sum basis to apply as your standard, your plan amendment that terminates the Plan should contain it. The PBGC may not allow adoption of an amendment to reduce benefits after the Plan termination date. I believe there was an ASPPA ASAP covering this very issue.

[Guest SVP]

For an ongoing plan isn't the plan allowed to become operationally compliant before amending the plan? Could the plan use the new PPA basis effective 1/1/08 (taking advantage of the anti cutback relief) of PPA? Then conform the document with an amendment later? They have until 2009 to amend.

[Blinky the 3-eyed Fish]

SVP, you can't make sweeping comments that all required amendments get 411(d)(6) protection. Some do and some don't.

[John Feldt ERPA CPC QPA]

I've seen a PBGC audit sting people before with regard to the changes from pre-GATT to GATT rates. This looks similar to me, thus the question. I think Mike's guess is as good as any until we see some other official guidance. We'll adopt as needed for terminating plans as Andy sugggested.

Thanks for the comments!

[tymesup]

IIRC, the PBGC "logic" was that a terminating plan required the change to GATT rates. However, it could have grandfathered PBGC rates. Therefore, the PBGC did grandfather PBGC rates after the plan terminated but before it amended for GATT.

It's not clear to me why they were treating a terminating plan differently from an ongoing plan.

I don't know if this issue was resolved.

[FAPInJax]

This question was kind of answered at ASPPA. They refer back to 1.401-20 Q&A-16 to point out that you have lost the relief available in relation to the QJSA not being the most valuable benefit. This could therefore be a problem.

QA 26 from the IRS Q&A for DB plans.

[John Feldt ERPA CPC QPA]

And to avoid the potential problem, an amendment to adopt the new 417(e) rates and mortality for the 2008 plan year seems to be solution, before the 2008 plan year begins?

[rcline46]

What I heard at the DB IRS Q&A session was that a terminated plan would not become subject to PPA.

[FAPInJax]

I heard the same thing as RCline46 which is that terminated plans will not be required to go to PPA calculations.

[ak2ary]

I agree with RCLINE, assuming the plan is terminating. Holland said that a plan that terminates in 2007 never becomes subject to PPA and thus does not have to comply with the PPA 417(e) provisions

I don't read this post as saying the plan is terminating, however. In that case, Bill Bortz said at an ERIC meeting that plans that used a reasonable transition from GATT to PPA would not have to worry about most valuable benefit rules or 411(d)(6) just because they used GATT for some period of 2008.

Holland at ASPPA said that someone from Treasury had publicly indicated that there would be some transition, so Jim assumes there will some over-lap period allowed. But that long term, on an ongoing basis, retaining GATT rates causes a most valuable benefit problem

[John Feldt ERPA CPC QPA]

Thanks Tom, that is exactly the focus of my question. I was much more concerned with the ongoing plans and the potential need to amend every one of them before their 2008 plan year.

With your comments in mind, I hope to see forthcoming guidance to assure the transition from GATT to PPA rates without scrambling to amend right now.

For plans paying lump sums after their 2007 plan years, I assume the PBGC would require the largest lump sum payout under GATT or PPA until an amendment is adopted (if GATT would ever be a higher lump sum).

[Guest nancy_keppelman]

It is mu understanding that under the PPA, Congress said plans could go to PPA from GATT effective 1/1/2008 (or the first day of the 2008 year) without there being any cutback. In addition, the PPA says plans have until the end of the 2009 plan year to be amended to comply with PPA. However, as raised in a different message (204(h) notice required), our concern is that in order to change to PPA factors, which could result in significantly lower lump sums, there must be a 204(h) notice, even though the actual plan amendment doesn't have to be done until later. The IRS should issue guidance on this right now. We have 15 days until the deadline for a 204(h) notice for a 1./1/2008 change.

[tymesup]

Note that small plans only need 15 days lead time for a 204(h) notice.

[FAPInJax]

One additional possible complication raised at ASPPA.

The IRS stated that although plans do not have to be amended until the end of the 2009 year there is a problem with plans losing the relief for QJSA being the most valuable benefit if lump sums are calculated using a rate (like 30 year treasuries, high quality bond, etc.). They went on to say that they believe it would be permissible for 'some period of time' but probably not through the end of the 2009 plan year - regulations will be forthcoming.

Therefore, it might be best to execute a quickie amendment if your actuarial equivalence is defined as the GATT rate or something similar.

An additional problem is that we do not know for sure that lower lump sums will result because they have not released the mortality to be used in the calculation of the PVAB floor.

[ak2ary]

I didn't get that from Holland's response. My understanding is that, based on comments that Treasury reps had made, there would be some transition allowed where you could pay the greater of PPA and GATT rates and then get rid of GATT rates without a 411(d)(6) problem. But I didn't hear him say that you could wait to amend until 2009 and would be shocked if that happened (of course I have been shocked before and likely will be again). The treasury response came when asked about plans that currently have qjsa notices out with respect to benefits with an ASD in January. They don't want to pay the lesser PPA lump sum and have the employees complain, but they don't want to create a protected GATT benefit by continuing to pay a GATT benefit in 2008. The treasury response, I understand, was that plans making reasonable transitions from GATT to PPA shouldn't worry that they will get snared by a most valuable or 411(d)(6) trap.

My guess (and it is pure guess) is that the regs will allow a short transition period from GATT to PPA and that you will need to reference the PPA rates (which BTW are simply the applicable interest rates and the applicable mortality table, so your plans may already be covered) before you can pay PPA benefit

[Guest SVP]

What about plans that incorporate 417(e) applicable interest and mortality by reference in the plan and use it as the actuarial equivalence basis for all conversions - not just lumps sums but also the QJSA and 10 C&C for instance???

It would appear that under PPA that 417(e) forms (i.e. lump sums) have relief from anti-cutback under 411(d)(6). But what about the QJSA and 10C&C? Can or should those conversion factors be determined on the PPA basis for app int and mort?

Technically the plan's definition of AE is applicable interest and mortality under 417(e) which the gov't has now changed. Basically the gov't changes the basis used for app int and mort and the plan says app int and mort for all AE so would you think it is appropriate to move to that new basis for all optional forms without grandfathering?

I would think that this would be risky but it's happening in part driven by the relative value regs with some reliance on Notice 96-8 for cash balance plan payments.

[Guest nancy_keppelman]

The IRS just posted a notice that a 204(h) notice is not required for a traditional defined benefit plan switching from GATT to PPA. Also the mortality table will be in new Rev. Ruling 2007-67.

[Guest KennyH]

What about plans that incorporate 417(e) applicable interest and mortality by reference in the plan and use it as the actuarial equivalence basis for all conversions - not just lumps sums but also the QJSA and 10 C&C for instance???

It would appear that under PPA that 417(e) forms (i.e. lump sums) have relief from anti-cutback under 411(d)(6). But what about the QJSA and 10C&C? Can or should those conversion factors be determined on the PPA basis for app int and mort?

Technically the plan's definition of AE is applicable interest and mortality under 417(e) which the gov't has now changed. Basically the gov't changes the basis used for app int and mort and the plan says app int and mort for all AE so would you think it is appropriate to move to that new basis for all optional forms without grandfathering?

I would think that this would be risky but it's happening in part driven by the relative value regs with some reliance on Notice 96-8 for cash balance plan payments.

Take a look at RR 2007-67. My initial reaction is that any direct reference to 417(e)(3) is covered under the relief even for plan AE, but IRS rulings can sometimes go against common sense. Have you checked the Gray Book? I would be surprised if this hasn't come up recently with other changes to the Applicable Mortality Table and Inerest Rate.