PEP Lump Sum Question

[Guest LarryD]

Question on Pension Equity Plans (PEP):

I have a PEP that generates a lump sum through a FAP formula, then converts the lump sum to an annuity based on a 4.00% Interest Rate and the UP 1984 Mortality Table. I currently have a participant age 60 whose lump sum under the plan is equal to $13,600, and whose annuity based on the assumptions above converts to $130/mo., payable at NRD (age 65). Do I need to then calculate a revised lump sum based on the $130 annuity amount, but multiplied by the applicable segment rates (e.g. the December 2007 segment rates and the RP-2000 Combined Table for 2008 lump sums)?

Doing this generates a lump sum of $13,800, so I am thinking the plan may be required to kick in an extra $200 for this participant's lump sum.

[Mike Preston]

Is the PEP sponsored by a government or governmental agency?

[Guest LarryD]

Is the PEP sponsored by a government or governmental agency?

No it is not.

[Mike Preston]

Yes, you are on the right track. I assume you are using some sort of age adjustments/rounding in your descriptions, because I can't match your numbers very closely. But, as to the general statement that you have a db plan (which just happens to be a PEP) with an accrued benefit of $130 payable as a lump sum which evaluates to $X under the plan's definition of actuarial equivalence and $X+ under the required 417(e) definition, and therefore you must pay $X+, I concur.

Were you thinking that because this is a PEP that there was a way around the normal rules of 417(e)?

[Guest LarryD]

Yes, you are on the right track. I assume you are using some sort of age adjustments/rounding in your descriptions, because I can't match your numbers very closely. But, as to the general statement that you have a db plan (which just happens to be a PEP) with an accrued benefit of $130 payable as a lump sum which evaluates to $X under the plan's definition of actuarial equivalence and $X+ under the required 417(e) definition, and therefore you must pay $X+, I concur.

Were you thinking that because this is a PEP that there was a way around the normal rules of 417(e)?

The normal form of annuity payment is 10CC, plus the participant is actually age 59 and 6 mos., so there are additional adjustments and rounding going on for me to get from the $13,600 LS to the $130 annuity, which is probably why you are not hitting out to those exact numbers.

I know there has been a lot of proposed regs recently dealing with Cash Balance plans and whipsaw, and what interest rates will allow a plan to avoid any adjusted lump sum calculations, etc. But as far as I can see there hasn't been too much out there specifically dealing with PEP's.

I think the main issue with my particular plan is the Mortality Table being used in the conversion. If we were to use a more current table I don't think there would be an issue. For example, when I used the 2008 Lump Sum table with a 4% interest rate, the lump sum converted to a L.A. of $115 per month. When I then recalculate the lump sum using the segment rates based on this annuity, the new lump sum is below the plan amount of $13,600.

Based on above, one solution could be for the plan to amend to a more current table. But of course that brings up another potential issue: 204(h) notices being required. In my example above, if the plan were amended to use the 2008 LS table, the participant's annuity would decrease from $130 to $115, however the lump sum under the plan would remain unchanged at $13,600. Would 204(h) be required in this case? Since the normal form of benefit under the plan is a lump sum, and that amount is not affected by this amendment, would a 204(h) notice be required? Or is the decreased annuity at NRD the deciding factor?

[Mike Preston]

The decreased annuity is the deciding factor.

[Guest LarryD]

The decreased annuity is the deciding factor.

Figured as much.

Thanks. I appreciate your help with this.

[ak2ary]

PPA specifically exempts PEP plans from whipsaw...doesn't it

“defined benefit plan under which the accrued benefit (or any portion thereof) is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation.”

I believe the bold portion of the above is meant to specifically cover peps

[Mike Preston]

Don't you have to be an applicable defined benefit plan for that? Is there any evidence that the OP's plan is one of those?