Minimum Lump Sums under PPA

[Guest Grumpy456]

I have what should be an easy question.

For 2008, minimum lump sums from DB plans are computed using 20% of the PPA's present value methodology and 80% of the pre-PPA present value methodology. My question relates only to the pre-PPA present value methodology--as applied now.

Here's the thing, prior to PPA, we used the Applicable Interest Rate and the Applicable Mortality Table (which, last year at least, was the 94GARU mortality table) in calculating minimum lump sums. The Applicable Mortality Table is now different from the 94GARU mortality table--the new Applicable Mortality Table is defined in IRS Rev. Rul. 2007-67.

Camp 1

I have heard some actuaries say that the 94GARU mortality table must be used for purposes of calculating 80% of the pre-PPA present value methodology.

Camp 2

I have heard other actuaries say that the 94GARU mortality table no longer applies and that instead the new Applicable Mortality Table defined in IRS Rev. Rul. 2007-67 must be used for purposes of calculating 80% of the pre-PPA present value methodology.

Neither camp can site anything supporting their position except that Camp 2 sites IRS Rev. Rul. 2007-67's language stating that the new Applicable Mortality Table applies to all distributions made in 2008.

Does anyone else find this same confusion and have any helpful thoughts/comments? Thanks.

[Mike Preston]

I'd be interested in any citations that the folks who think one must retain use of the old table have. My understanding isn't that you phase in the old rules to the new rules at 20% per year. My understanding is that you use the new structure immediately. The "phase-in" is merely referencing the fact that the interest rates you use in your calculations are based on a phase-in. If your version of how it works is correct, I have a bunch of re-programming to do!

[FAPInJax]

The IRS publishes the 20/80 interest rates in their Notices. The use of this blended interest rate with the 2008 Applicable mortality table produces the minimum lump sum (one can argue whether there is pre-retirement mortality or not - IRS says mandatory / practitioners have been using it or not depending on AE definition)

[Guest Grumpy456]

I'd be interested in any citations that the folks who think one must retain use of the old table have. My understanding isn't that you phase in the old rules to the new rules at 20% per year. My understanding is that you use the new structure immediately. The "phase-in" is merely referencing the fact that the interest rates you use in your calculations are based on a phase-in. If your version of how it works is correct, I have a bunch of re-programming to do!

Mike, I agree with you that the 2008 Applicable Mortality Table has replaced the 94GARU table for post-12/31/2007 distributions for purposes of computing the benefit under the old rules. What generated my question is the fact that two actuaries I use frequently have told me that in computing the benefit under the old rules you continue to use the 94GARU table--that position seems to cut against the IRS's position in Rev. Rul. 2007-67 (i.e., the position that the mortality table is not phased-in--it simply is changed effective 1/1/2008). I'm reassured that you agree with my position.

[Guest Grumpy456]

Mike, now I have a question about the new rules.

The attachment suggests a relatively easy calculation using each of the segmented rates. However, an actuary buddy told me that the attachment does not accurately illustrate the necessary computations. According to him, take the first case as an example (see page 3 of the attachment--part of a presentation given at the 2007 EA Meeting):

He claims A x [N65 - N66]/D61 using 3.05% interest, PLUS

A x [N66-N81]/D61 using 5.81% interest, PLUS

A x N81/D61 using 6.72% interest is INCORRECT.

He claims, instead, that it should be A x [N65 - N66]/D61 using 3.05% interest, PLUS

A x [N66-N81]/D66 using 5.81% interest times D66/D61 using 3.05% interest, PLUS

A x N81/D81 using 6.72% interest times D81/D66 using 5.81% interest times D66/D61 using 3.05% interest

How have you programmed your system? I don't care what the right answer is, but I cannot locate anything on this computation--you'd think the IRS would put out examples so that actuaries wouldn't have to guess at the right meaning. I am now presented with two different actuarial interpretations of the new rules. If both interpretations are reasonable and satisfy the IRS, I like the easier one. Any help you (or anyone else) can give me would be greatly appreciated! Thanks.

208_B.pdf

[Mike Preston]

The presentation at the EA meeting appears correct to me (if you ignore the annual benefit payable monthly stuff - I didn't look at that part).

You need to have whatever source is telling you that it is incorrect come up with a cite as to veracity of the other methodology. I don't think they can, but I suppose anything is possible.

Yes, I have programmed my calculation routines (both excel based and in a separate application) to use the interest rate methodology of the EA meeting presentation.

[Mike Preston]

I'd be interested in any citations that the folks who think one must retain use of the old table have. My understanding isn't that you phase in the old rules to the new rules at 20% per year. My understanding is that you use the new structure immediately. The "phase-in" is merely referencing the fact that the interest rates you use in your calculations are based on a phase-in. If your version of how it works is correct, I have a bunch of re-programming to do!

Mike, I agree with you that the 2008 Applicable Mortality Table has replaced the 94GARU table for post-12/31/2007 distributions for purposes of computing the benefit under the old rules. What generated my question is the fact that two actuaries I use frequently have told me that in computing the benefit under the old rules you continue to use the 94GARU table--that position seems to cut against the IRS's position in Rev. Rul. 2007-67 (i.e., the position that the mortality table is not phased-in--it simply is changed effective 1/1/2008). I'm reassured that you agree with my position.

I'm not sure we are on precisely the same page. You said "old rules" in your first sentence. Did you mean "new rules"?

[Mike Preston]

OK, let's set some nomenclature here so that we aren't on different pages. "Old rules" should refer to a calculation made under the law as it existed before PPA. "New rules" should refer to a calculation made under the law, after the effective date of PPA.

Part of the confusion is that somebody has started mixing the two. The mere fact that a calculation made under the "new rules" involves a two-tier calculation doesn't mean that the first tier of that calculation is in any way a calculation under "old rules." It is still "new rules", but with different interest rates.

There is only one circumstance where a post-PPA effective date distribution can be made under "old rules" and that is a situation where there really is no PPA effective date! That is, a plan which was terminated prior to its PPA effective date will forever more pay out on the basis of the "old rules" as the "new rules" just don't apply to that plan.

But any plan that is not terminated prior to its PPA effective date will have the "new rules" and only the "new rules" apply to lump sums paid after its PPA effective date.

Better?

[Mike Preston]

As far as a cite that goes to the issue of whether the EA presentation was correct or incorrect, how about the following:

The PBGC has published some lump sums at: http://www.pbgc.gov/practitioners/miscella...ables/pvmg.html

This is based on the table published here: http://www.pbgc.gov/media/news-archive/new...07/pr08-07.html

Using the EA meeting methodology, my program's results are accurate to $1. Can your actuaries claim the same?

I know that using a PBGC calculation to confirm/deny an IRS methodology is not an iron clad proof. But it isn't a bad start, IMO.

[Guest Grumpy456]

OK, let's set some nomenclature here so that we aren't on different pages. "Old rules" should refer to a calculation made under the law as it existed before PPA. "New rules" should refer to a calculation made under the law, after the effective date of PPA.

Part of the confusion is that somebody has started mixing the two. The mere fact that a calculation made under the "new rules" involves a two-tier calculation doesn't mean that the first tier of that calculation is in any way a calculation under "old rules." It is still "new rules", but with different interest rates.

There is only one circumstance where a post-PPA effective date distribution can be made under "old rules" and that is a situation where there really is no PPA effective date! That is, a plan which was terminated prior to its PPA effective date will forever more pay out on the basis of the "old rules" as the "new rules" just don't apply to that plan.

But any plan that is not terminated prior to its PPA effective date will have the "new rules" and only the "new rules" apply to lump sums paid after its PPA effective date.

Better?

Mike, good points all around and thanks very much for your response. You are absolutely right that but for a plan that terminated prior to 1/1/2008, all calculations are made under the "new rules" where that term means the rules imposed by PPA. And I agree with your analysis that the new rules contain a two-tiered methodology. It's that two-tiered methodology that I think confuses people (including me). The first tier, if I have it right, involves calculating a lump sum using the 2008 Applicable Mortality Table (not the 94GARU table) and whatever single interest rate applies. I have heard many actuaries refer to the first tier as the "old law rule" or some such thing--but you're right--it's actually part of the "new rules" and should be referred to as such. For 2008, multiplying the first tier lump sum by 80% provides part of the overall calculation. My initial question was whether, in calculating the first tier lump sum, I should use the 2008 Applicable Mortality Table (which was my answer) or the 94GARU table I have heard at least two EAs say to use (although they could not provide me with any citation justifying their conclusion and did not believe that IRS Rev. Rul. 2007-67 resolve the issue).

The second tier calculation then reared its ugly head and created the further question that I asked you about, whether proper calculation of the second tier lump sum should be made as described in the EA Meeting presentation materials or using the "more involved" (not my phrase) methodology I have heard some actuaries assert. I am very glad to hear that you agree with the methodology presented at the 2007 EA Meeting. Adding 80% of the first tier lump sum to 20% of the second tier lump sum gives us the new 417(e) minimum lump sum (at least for 2008).

Thanks also for the PBGC cites--I haven't reviewed that material yet, but will do so shortly. Again, thanks for your comments and help. The only other thing I'd ask is that if this summary is inaccurate in some material way, please respond so that I don't think I have it right, but really don't.

[Mike Preston]

You don't.

I may have misled you with some of my words.

The new law's methodology is effective as of the PPA effective date. I think we agree on that. It is the phase-in methodology that still is described incorrectly in your last post.

The phase-in methodology is merely a method to determine the segment rates. There are "raw" segment rates (that is, those that are NOT phased in) and there are "phased-in" segment rates. The IRS publishes both. The new law requires that we take the raw segment rates and blend them with the rate from the old law. I'll use hypothetical, rather than real, numbers to try and drive home the point.

Assume the IRS publishes the raw segment rates for a given month and they are 5%, 6% and 7%. Assume that the old law rate would be 4%.

It is a simple mathematical calculation to determine the phased in rates. Speaking of lump sums (there are different rules for funding), the 2008 phase in percentage is 20%.

Hence, we take 80% time 4% and 20% times 5% and add them up to come up with a phased in rate of 4.2%. We do the same with 80% of 4% and 20% of 6%, to come up with 4.4%. Finally, we do the same with 80% of 4% and 20% of 7% to come up with 4.6%. We now forget about the old law and we forget about the raw percentages. We merely do a single calculation under the new law's rules (in accordance with the EA meeting methodology), using the 4.2%, 4.4% and 4.6% we came up with.

We specifically do not do a calculation at 4% and then take 80% of that result and then do a calculation using the raw segment rates of 5%, 6% and 7% and then take 20% of that result.

Clearer?

[Guest Grumpy456]

You don't.

I may have misled you with some of my words.

The new law's methodology is effective as of the PPA effective date. I think we agree on that. It is the phase-in methodology that still is described incorrectly in your last post.

The phase-in methodology is merely a method to determine the segment rates. There are "raw" segment rates (that is, those that are NOT phased in) and there are "phased-in" segment rates. The IRS publishes both. The new law requires that we take the raw segment rates and blend them with the rate from the old law. I'll use hypothetical, rather than real, numbers to try and drive home the point.

Assume the IRS publishes the raw segment rates for a given month and they are 5%, 6% and 7%. Assume that the old law rate would be 4%.

It is a simple mathematical calculation to determine the phased in rates. Speaking of lump sums (there are different rules for funding), the 2008 phase in percentage is 20%.

Hence, we take 80% time 4% and 20% times 5% and add them up to come up with a phased in rate of 4.2%. We do the same with 80% of 4% and 20% of 6%, to come up with 4.4%. Finally, we do the same with 80% of 4% and 20% of 7% to come up with 4.6%. We now forget about the old law and we forget about the raw percentages. We merely do a single calculation under the new law's rules (in accordance with the EA meeting methodology), using the 4.2%, 4.4% and 4.6% we came up with.

We specifically do not do a calculation at 4% and then take 80% of that result and then do a calculation using the raw segment rates of 5%, 6% and 7% and then take 20% of that result.

Clearer?

Awesome! That is very clear and extremely helpful. Thanks!