2008 Valuations for Small Plans

[zimbo]

In reviewing the recent regs on Measuring Liabilities for Pension Funding, there is a provision for plans that pay lump sums based upon the greater of 417(e) or actuarial equivalence (most small DBs). It seems to indicate that the computation of present value for Normal Cost and Target Liability must take into account the extent to which the PV of the expected lump sum distribution is greater than the PV of the 417(e) lump sum using 417(e) mortality and 430 segment rates.

In trying to decipher this, it seems if we have a plan that, for instance, uses GAR94 @5% for AE, then can we value the lump sum at assumed NRA based upon actuarial equivalence and then discount to current age using the 430 segment rates? Or, could we possibly discount to current age using the pre retirement AE interest rates?

Has anyone figured this out, since this has a direct impact on minimums and maximums for most small plans?

[ak2ary]

This was discussed in the ASPPA webcast in which Jim Holland participated..

It was indicated that you would value the 417(e) lump sum as described in the proposed regulation and you would compare that to the plan lump sum at annuity starting date (ASD) discounted from ASD to the valuation date using the segment rates. So if you are assuming commencemnt at NRA,

we value the lump sum at assumed NRA based upon actuarial equivalence and then discount to current age using the 430 segment rates

only if you are, for some reason, assuming immediate benefit commencement would you

discount to current age using the pre retirement AE interest rates

You would then take the greater of the plan rate calc and the 417(e) calc as your funding target

[zimbo]

Thank you. That is very helpful.

Now I can only hope that the good folks at DATAIR or RELIUS attended the same webcast or, at the very least, are reading this topic. Currently I don't believe either program is up to speed on this.

[AndyH]

Wow. Is that true? (Wystar can handle this but has other things to work out)

Is there any AFTAP relief expected from the Easter Bunny?

[Guest GMP]

Wow. Is that true? (Wystar can handle this but has other things to work out)

Is there any AFTAP relief expected from the Easter Bunny?

I think the last two items they had to take care in the valuation was the at-risk rules and the effective interest calc. Yesterday Steve told me that they have both of these nailed down and are currently reviewing them in-house. Jim's prepared a beta version of the 2008 val report. Call him and he'll send it to you.

[SoCalActuary]

Thank you. That is very helpful.

Now I can only hope that the good folks at DATAIR or RELIUS attended the same webcast or, at the very least, are reading this topic. Currently I don't believe either program is up to speed on this.

As a Datair user, I am told that the method reflecting 417 is close to release.

[AndyH]

Wow. Is that true? (Wystar can handle this but has other things to work out)

Is there any AFTAP relief expected from the Easter Bunny?

I think the last two items they had to take care in the valuation was the at-risk rules and the effective interest calc. Yesterday Steve told me that they have both of these nailed down and are currently reviewing them in-house. Jim's prepared a beta version of the 2008 val report. Call him and he'll send it to you.

GMP, I have the sample report but no calculation element (draft format only). Do you have more? Also, do you have something from them that explains where the target normal cost is going to come from on a pay related plan? Where in val.op or in the database is that number? Steve told us it would be done with the report calculations. Of course I'll check with Steve, but I'd be interested in your perspective or that of other users because of the lack of any user forums.

[FAPInJax]

I am still confused so pardon me if I attempt to introduce a numerical example.

Participant is 50.

Retirement age is 65.

There is a singular point of turnover at 60.

Plan pays the greater of AE or Applicable

PVAB possibilities at 60 (each of these is the PV of a monthly benefit commencing at 65)

Plan AE PVAB 60,000 75,000

417(e) (using 417(e) interest & mortality) 80,000 80,000

Something (using 430 interest and 417(e) mortality 70,000 70,000

Obviously, the plan rate does not matter in the first column of numbers. However, valuing the plan as the 70,000 appears to intentionally underfund the plan (if that is the intent - although © in the proposed regulations appear to state that "for purposes of applying paragraph (f)(4)(ii)(B), the computation of the present value MUST take into account the extent to which the present value of the distribution is greater than the present value determined using the rules of paragraph (f)(4)(iii)(B) of this section".

The second set of numbers has a slightly easier issue but the same basic result depending on the interpretation.

One or some combination of the above is multiplied by the probability of leaving at 60 and then I believe we all agree will be discounted to 50 using PPA funding assumptions (430 interest rates and mortality). The probability of the lump sum would also be applied if necessary.

Thanks for any responses.

[Guest GMP]

Wow. Is that true? (Wystar can handle this but has other things to work out)

Is there any AFTAP relief expected from the Easter Bunny?

I think the last two items they had to take care in the valuation was the at-risk rules and the effective interest calc. Yesterday Steve told me that they have both of these nailed down and are currently reviewing them in-house. Jim's prepared a beta version of the 2008 val report. Call him and he'll send it to you.

GMP, I have the sample report but no calculation element (draft format only). Do you have more? Also, do you have something from them that explains where the target normal cost is going to come from on a pay related plan? Where in val.op or in the database is that number? Steve told us it would be done with the report calculations. Of course I'll check with Steve, but I'd be interested in your perspective or that of other users because of the lack of any user forums.

I'm afraid I don't have the answer to your question. And, yes, I really wish they would put up a users forum. It's really needed. I've requested this a number of times.

[LP_Actuary 93]

I am new to the small plans world and have a follow-up question to this string from several years ago. As user zimbo implied, Reg 1.430(d)-1(f)(4)(iii)(D) requires that the FT and NC must take into account the extent to which the PV of the expected lump sum is greater than the PV of the 417(e) lump sum. Zimbo also inferred that providing the greater of 417(e) and the plan's AE is common in small plans. I presume that in the event that the plan document for the small plan does not provide the greater of 417(e) and plan's AE that this Reg can be disregarded. I have seen a couple of references of this approach for some newly acquired small plans where the plan document does not provide for this comparison so want to be sure I am not overlooking some nuance with small plans in that regard. Thanks for any comments.

[Effen]

It doesn't really differ between small plans and larger plans - we do the same thing for any plan that offers lump sums only at the 417(e) rates.

If the plan pays lump sums at the 417(e) rate, you simply substitute the 417(e) mortality for the 436 mortality -post decrement. I believe the regs are fairly clear on this, but I can't provide a site at this moment.

[Mike Preston]

If not a site, what about a cite? :-)

[david rigby]

Cite:
https://www.irs.gov/irb/2009-50_IRB/ar05.html. Reg. 1.430(d)-1(f)(4). Published in the Federal Register 10/15/09.

It can be easy to misread the exact cite of sections/subsections/paragraphs/subparagraphs, so I might have made a mistake. You can search for the phrase, "probability of benefit payments..."

[My 2 cents]

Valuations under PPA consist of two steps:

1. Calculate a benefits cash flow. If the plan has a lump sum based on basis A or 417(e) (whichever is greater), then to the extent that lump sums are expected, do the calculations of the future expected lump sum amounts using basis A as is or 417(e) with the funding segment rates used as though they were the segment rates to be used under 417(e). All applicable mortality effects would be reflected here.

2. Discount the benefits cash flow using the funding segment rates. This is based solely on discount rates, no mortality built into this step.

For 417(e) only plans, the discounted value of the projected lump sums would, but for switching to unisex mortality to calculate the lump sums expected, come out exactly the same as discounting the normal form annuities.

You would not build the cash flow in a way that would reflect the mortality basis for the lump sums for periods between the valuation date and the date(s) on which the lump sums are expected to be paid. The probability of surviving to those dates is based on the funding mortality rates.