Safe harbor vs. General Testing Sanity Check

[AndyH]

Looking at an integrated DB plan that was clearly originally designed to conform to 401(l) in terms of annuity benefits because the early retirement factors are right from the 401(l) tables and the plan looks like a the safe harbor offset.

The plan now provides, however, that a lump sum is offered and the lump sum amount is based upon the total accrued benefit and is the greater of the amount that would be derived from PBGC rates (e.g. 3.50% or so immediate, 4% deferred) and UP84 Mortality, or the amount that would be derived from use of the GATT rates.

I think that continued use of a lump sum factor that might exeed the 417(e) requirements violates 411(l) and creates the need for the general test.

Cite is 1.401(l)-3(B)(4)(E).

Agree/Disagree?

[Penman2006]

Are you saying that the plan AE is defined as the PBGC rate and UP84? I recall that a plan with an integrated formula must use an AE interest rate between 7.5% and 8.5% (at least with respect to the integrated portion of the benefit) in order to be safe harbor otherwise general testing would be required.

[AndyH]

Almost. But you are close to my point.

Act Equiv is defined as the applicable interest and mortality table for all purposes other than lump sums. BUT early retirement has it's own reduction, one to the base and the other to the excess (the latter complying with 401(l)).

My interpretation is that if such a plan also has a lump sum based on the deferred accrued benefit and computed solely on 417(e), that is ok under 401(l) and therefore remains a safe harbor.

But if a plan says the lump sum is the greater of the 417(e) amount and something else (e.g. a flat 5% or in this case UP84 at PBGC rates) then I think that violates 401(l) in an integrated plan and makes it a non-safe harbor.

I think the 7.5-8.5 that you reference serves two purposes - to satisfy 401(l) with respect to early retirement and also with respect to other annuity forms. So you may have pointed out another non-safe harbor issue - the use of 417(e) for conversion of annuity forms does not fly either.