Funding for lump sum at 415 limit under PPA

[Blinky the 3-eyed Fish]

I was wondering how people are funding for lump sums at the 415 limit under PPA.

There are 3 things to consider:

1) Plan AE

2) 5.5% and 94 GAR (maybe changes to '08 Applicable Mortality but not yet)

3) 105% of benefit using 417(e) rates

1) and 2) seem straightforward: compute the LS at the ASD and discount at the single segment rate to attained age (AA). But how to compute 3)?

I can see three conceivable ways: a) compute LS at ASD using the deferred segment rates and discount from ASD to AA using the single segment rate * 105%; or b) compute the LS at ASD as if the person were the same age as on the ASD and discount from ASD to AA using the single segment rate * 105%; or c) compute LS at AA * 105%.

Not to influence your answer, but I would pick a). Then take the lesser of 1, 2) or 3).

[Guest lerieleech]

This does not answer your question, but from what I understand, the Technical Corrections bill just passed by the House (and now in the Senate) would remove the "105% prong of the IRC 415 interest rate."

[Guest lerieleech]

I was wondering how people are funding for lump sums at the 415 limit under PPA.

There are 3 things to consider:

1) Plan AE

2) 5.5% and 94 GAR (maybe changes to '08 Applicable Mortality but not yet)

3) 105% of benefit using 417(e) rates

1) and 2) seem straightforward: compute the LS at the ASD and discount at the single segment rate to attained age (AA). But how to compute 3)?

I can see three conceivable ways: a) compute LS at ASD using the deferred segment rates and discount from ASD to AA using the single segment rate * 105%; or b) compute the LS at ASD as if the person were the same age as on the ASD and discount from ASD to AA using the single segment rate * 105%; or c) compute LS at AA * 105%.

Not to influence your answer, but I would pick a). Then take the lesser of 1, 2) or 3).

This is not an answer to your original question, but are there any updates on whether 94 GAR will change to '08 Applicable Mortality for purposes of calculating the maximum 415 lump sum at 5.5%?

[SoCalActuary]

My reading of the 415 limits is different than the original post.

The Annuity Starting Date is the date of the lump sum payment, regardless of the normal retirement date.

So all benefits are adjusted to reflect the 415 limit as of the ASD.

Plan rules provide lump sum before age 62 for an individual. This does not have to be a discounted value of a future annuity payment, because it may be governed by a PEP, or a cash balance account, or by the cash value of an insurance policy.

415 rules with the dual interest rates provide that the 415 dollar limit is adjusted using 5% (or plan interest rate if greater) and the 94 GAR table to produce a life annuity at the ASD, which is then valued at 5.5% for lump sum.

417(e) rules provide a discounted value of a monthly benefit using the selected 3-tier rates and the current mortality table.

So the allowable lump sum benefit is the lesser of:

1. Greater of: (a) Plan rate lump sum

(b) 417(e) lump sum

2. 415 limit lump sum

3. 105% of 417(e).

Now Tech Corrections is supposed to remove the third tier limitation, and to allow the IRS to issue new tables for 415 limits, so you will not have to maintain AE calculations on three different tables for the calculations.

Hope this helps.

[tymesup]

http://www.actuarialoutpost.com/actuarial_...p;highlight=415

[Blinky the 3-eyed Fish]

SoCal, the post is in regard to funding a benefit at the 415 limit, not an actual distribution of benefit.

[SoCalActuary]

SoCal, the post is in regard to funding a benefit at the 415 limit, not an actual distribution of benefit.

Thanks for that correction.

To answer your concern, I should ask what assumption you wish to make about future 417(e) values. Will the future yield curve be economically consistent with the current yield curve or will it look like the current rates at the time of ASD? I happen to think that choice b is more logical, except when the current yield curve is upside down.

Perhaps the better choice is to allow an assumption of the future yield curve for 417(e), maybe based on some average difference between the three segments, with the ultimate rate based on some reasonable long term assumption. If the average first segment is 0.75% below the 3rd segment, and the second segment averages 0.4% below the 3rd segment, then you could make an assumption of the appropriate 3rd rate segment at ASD, which could vary by year, I suppose. Then you would apply the average difference to get the assumed 1st & 2nd rates. From those, you would compute the expected 417(e) lump sum.

Finally, note that I disagreed with your 1st choice of lump sum. Instead, I believe you should use the greater of the plan rate or the regular 417e value, before applying the other two limitations.

Good luck deciding what is reasonable. I don't think anyone has the one best answer on this issue.

[Blinky the 3-eyed Fish]

This might all be a moot discussion if indeed the technical corrections wipe away the 105% rule, but I will carry it on just a little longer.

From past readings of the proposed regs. my understanding is that for funding, if a lump sum is assumed and the benefit is not at the 415 limit, the only change in valuing the benefits from an annuity basis is to use the '08 Applicable Mortality Table instead of the sex distinct table (whatever that table is called, I don't remember). However, there is no change in the interest rate assumption, you still use the funding segment rates. In other words, there is no different 417(e) interest assumption. I would presume then that when valuing a benefit at the 415 limit, when considering the 105% of 417(e) rate limit, the same methodology would be followed and no different 417(e) assumption is made, just that the the rates are equal to the segment rates for funding.

Finally, note that I disagreed with your 1st choice of lump sum. Instead, I believe you should use the greater of the plan rate or the regular 417e value, before applying the other two limitations.

I didn't understand this comment. I never mentioned needing to value the greater of the plan benefit and 417(e) benefit, because I gave as fact that the lump sum was at the 415 limit.

One additional item. I forgot to mention that I know of the allowable adjustments that can be made to the interest rates to distinguish between how the funding rates are phased in versus the 417(e) rates. I wouldn't consider that an assumption of future rates though.

[Andy the Actuary]

Why wouldn't you simply limit the accrued benefit by 415 (i.e., for a high paid person, to the 415 dollar amount) and apply the segment rates and applicable mortality table (as of the ASD)?

[Blinky the 3-eyed Fish]

Why wouldn't you simply limit the accrued benefit by 415 (i.e., for a high paid person, to the 415 dollar amount) and apply the segment rates and applicable mortality table (as of the ASD)?

Because I am assuming a lump sum and I don't believe that is the proper way to do it.

[Andy the Actuary]

Why wouldn't you simply limit the accrued benefit by 415 (i.e., for a high paid person, to the 415 dollar amount) and apply the segment rates and applicable mortality table (as of the ASD)?

Because I am assuming a lump sum and I don't believe that is the proper way to do it.

Please bear with my (possibly ignorance). Isn't what I'm suggesting what the December 2007 proposed regs indicated to do if the beneift is payable in a lump sum. If not, what am I misunderstanding?

"In the case of a distribution that is subject to section 417(e)(3) and that is determined using the applicable interest rate and applicable mortality table under section 417(e)(3), the proposed regulations would provide that the computation of the present value of that distribution will be treated as having taken into account any difference in present value that results from the use of actuarial assumptions that are different from those prescribed by section 430(h) only if the present value of the distribution is determined by valuing the annuity that corresponds to the distribution using special actuarial assumptions. Under these special assumptions, for the periodbeginning with the annuity starting date, the current applicable mortality table under section 417(e)(3) is substituted for the mortality table under section 430(h)(3) that would otherwise apply. In addition, under these special actuarial assumptions, the valuation interest rates under section 430(h)(2) are used for all periods (as opposed to the interest rates under section 417(e)(3) which the plan uses to determine the amount of the benefit)."

[Blinky the 3-eyed Fish]

I don't think it's ignorance at all because the rules are less than clear. I believe your quoted paragraph states the methodology when benefits are not at a 415 lump sum limit. I base my opinion on this paragraph below just a little further along in the prop. regs., also on separate presentations I have attended and discussions with other actuaries.

In the case of a distribution that is subject to section 417(e)(3) but that is determined as the greater of the benefit determined using the applicable interest rate and the applicable mortality table under section 417(e)(3) and the benefit determined using some basis other than the section 417(e)(3) assumptions, the proposed regulations would provide that the computation of 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 applicable interest rate and applicable mortality table.

So for example, if the AE lump sum benefit is greater than what's determined under under the paragraph you quoted, that AE lump sum would be considered and discounted at the appropriate segment rate (singular rate). It follows from logic then that a benefit at a lump sum limit would be treated the same way.

My two cents.

[Andy the Actuary]

I don't think it's ignorance at all because the rules are less than clear. I believe your quoted paragraph states the methodology when benefits are not at a 415 lump sum limit. I base my opinion on this paragraph below just a little further along in the prop. regs., also on separate presentations I have attended and discussions with other actuaries.

In the case of a distribution that is subject to section 417(e)(3) but that is determined as the greater of the benefit determined using the applicable interest rate and the applicable mortality table under section 417(e)(3) and the benefit determined using some basis other than the section 417(e)(3) assumptions, the proposed regulations would provide that the computation of 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 applicable interest rate and applicable mortality table.

So for example, if the AE lump sum benefit is greater than what's determined under under the paragraph you quoted, that AE lump sum would be considered and discounted at the appropriate segment rate (singular rate). It follows from logic then that a benefit at a lump sum limit would be treated the same way.

My two cents.

Thank you for your spare change. The Plans I was thinking about use the 417(e) assumptions. I am a slave to my mind set.

[Andy the Actuary]

I was wondering how people are funding for lump sums at the 415 limit under PPA.

There are 3 things to consider:

1) Plan AE

2) 5.5% and 94 GAR (maybe changes to '08 Applicable Mortality but not yet)

3) 105% of benefit using 417(e) rates

1) and 2) seem straightforward: compute the LS at the ASD and discount at the single segment rate to attained age (AA). But how to compute 3)?

I can see three conceivable ways: a) compute LS at ASD using the deferred segment rates and discount from ASD to AA using the single segment rate * 105%; or b) compute the LS at ASD as if the person were the same age as on the ASD and discount from ASD to AA using the single segment rate * 105%; or c) compute LS at AA * 105%.

Not to influence your answer, but I would pick a). Then take the lesser of 1, 2) or 3).

Given I have recovered from my mental set, your alternative (a) makes the most sense (actually what makes the most sense is for Congress to repeal the 105% provision). Alternative © appears to dismiss the flavor of the calculation so I will dismiss further discussion about it. Alternative (b) says pretend it's now "x" years in the future but use the three segments determined today, so that you're in effect using the first segment when no payments are theoretically being made in the first 5 years. Alternative (a) reflects today's yield curve; alternative (b) assumes today's yield curve will apply in perpetuity. Further, alternative (a) is consistent with the funding valuation of lump sum calculations where the basis is 417(e) and 415 does not apply. The hard part to explain is that you could have two brothers (they could also be sisters) of different ages with the same plan benefit. Alternative (a) could produce different 415 lump sums (whereas alternative (b) would not).

Nonetheless, I vote (a). By the way, my vote was bankable only during the Great Depression!

[tymesup]

IIRC, another board suggested there could be times when you are forced to overfund a plan, based on PPA's own assumptions. I wish I still had some of those magic beans.