417(e) alternate interpretation?

[AndyH]

Takeover DB plan from a major firm says the lump sum (not just the minimum lump sum-only one definition) is based upon the

"mortality table specified in Section 417(e)(3) of the Code and an interest rate equal to the rate defined in Section 417(e)(3)(A)(ii)(II) of the Code for the month of October immediately preceding the Plan Year during which the termination occurs."

So, if I terminate in 2005 and get a lump sum in 2007 the 417(e) rate used is for 10/04. The plan has been administered this way and the actuarial firm even gave client a template that calculates benefits this way.

Is there any justification for this that we may have missed? We think that "termination" replaced "distribution" in error, but major actuarial firm applied it as written.

[Andy the Actuary]

I am a minor actuarial firm but concur with you. IRS Regs. 1.417(e)-1(d)(4)(i) defines the time for determining the interest rate for the period that contains the annuity starting date. While (4)(iii) inidicates that a Plan Year is a permissible stability period, (i) makes it clear that such Plan Year must contain the annuity starting date. Yet, since I am a minor consulting firm, I would request the major consulting firm to provide a citation (e.g., IRS Rev. Rule or PBGC TAM) that supports their position. Major consulting firms sometimes have resources beyond the capabilities of minor consulting firms. Sometimes. Perhaps, somewhere out there is printed word that freezes the interest rate as of the Plan Year of termination.

Presumably, distributions were made in 2007 because of the delay in obtaining an IRS determination letter? Perhaps even more fascinating is what brought about your involvement after distributions have been completed or are almost completed? Finally, I note that the 10/04 GATT rate was 4.86% whereas the 10/06 Gatt rate was 4.85%. These rates serendipitously produce almost the same results as a practical matter, differing generally by no more than .3%. Assuming there is no justification for using the 10/04 GATT rate, Is it intended to pay additional amounts to avoid the plan disqualification exposure?

Happy holiday,

andy T.A.

[JAY21]

I'm betting the actuarial firm didn't draft the legal document but was bound by its terms. Why they didn't have it changed though is a mystery. I agree, I don't see how it meets the 417(e) requirements.

[JAY21]

Another thought might be there are trying to claim that the date of termination can be the "annuity starting date" for a lump sum distribution. I don't agree but.....

[Andy the Actuary]

Mr. Jay21

Not being a barrister, forgive me if I question how an actuary is bound to compute benefits according to the plan document but in a way that knowingly contravenes the law (if, indeed, that is the case).

There is the walk-away option if the client refuses to act in a law-abiding manner. Given my recent displeasure with the JB application fee increase, my mental health precludes me from reviewing the JB regs at this time. My recollection, however, is they contain some words in respect of professional conduct that would preclude the EA from acting in the manner you suggest. All this being said, your conclusion may be correct.

Happy holidays,

andy T.A.

[AndyH]

Thanks for your comments.

In terms of years, 10/04 vs. 10/06, they were merely examples-I don't know what the exact years were. Only the language is exact. I am passing along the question from a colleague. The existence of similar rates is merely a coincidence.

The prior firm definitely used (and programmed in a template) the applicable interest rate in the year of termination of employment, not year of payment, in multiple lump sum calculations.

Yes, we will of course go back and ask for an explanation and/or cite unless a light comes on here.

p.s. Jay could be on to something. The actuarial firm may not have written the document. Perhaps the written words provided a higher lump sum than the legal mimimum-then they might be bound by it until it was fixed. And maybe getting it fixed was delayed for some reason. There have been a couple of years where the applicable rate increased in the year of payment from the year of termination.

[JAY21]

Andy the Actuary, you are right. I should have said the actuarial firm "may have felt bound by its terms", not that they actually were if it was a violation of 417(e).