PPA - Funding Target

[Gary]

A plan is implemented in 2008 with a calendar year plan year.

We'll assume a 1 participant plan.

We'll also assume the following:

1st funding segment rate = 5%

2nd funding segment rate = 6%

3rd funding segment rate = 7%

1st 417e minimum present value segment rate = 4%

2nd 417e segment rate = 4.5%

3rd 417e segment rate = 5%

Plan rates are 5%, GAR94 (post ret only)

Hire Age and Participation Age = 45

NRA = 62

AB 1/1/08 = 10,000

Assumed form of payment at 62 is lump sum

Summary of PVAB 1/1/08 for verification:

using plan rates PVAB is presumed to be

v^17 using the 2nd funding seg rate of 6% for deferral period up to time of lump sum payment

at 62 compute pv benefit as a62 using 5%, GAR94

based on 417e min pv

v^17 using 2nd funding seg rate of 6% for deferral period up to time of lump sum (payment all at once, thus the 2nd funding segment rate)

at 62 compute pv ab as a62 based on 2nd funding seg rate for 3 more years and 3rd funding segment rate, thereafter. 2008 applicable unisex mortality table.

Note that I use v^17 using 2nd funding segment rate for entire time of annuity (even after the 20th year, where I would switch to 3rd funuding segment rate if form of payment were an annuity) since the payment is all made at the end of year 17 in a lump sum.

SInce th is so much in one thread, Part II will be the 415 lump sum basis, where it is subject to:

5.5%, Gar94

105% APR using 417e methodology

plan rates

Thank you

[mwyatt]

Gary, rightly (or wrongly), think that for funding purposes the proposed regs force you to use the funding segment interest rates for your 417 assumptions, so that if you are assuming a lump sum form of payment and your plan assumptions don't factor in, the PV would be based on the 417 unisex table and the funding segment rates (although you do get the option I believe to ignore the phase in). If yoiur plan assumptions would produce a subsidy (say in your example of 94 GAR @ 5%), think you would recognize the subsidy by calculating the value of the benefit at NRA using plan assumptions then discount back based on the funding segment rate applicable to the participant's time to retirement. If 415 is an issue, then think you would cap your projected LS payment @ NRA based upon the 415 assumptions, then again discount back using the funding segment rates.

As previously noted, there is a disconnect when applying the 417 rates for projection purposes in that the yield curve isn't projecting short term rates into the future but rather yields on varying maturity dates right now, which are two completely different animals. Given the "lock step" of these rates being the complete crystal ball allowed by the IRS, a more logical approach would at least be to calculate the PV @ NRD using the funding segment rates, assuming that your participant was at NRA right now, then discounting back using the segment rates (the double counting disparaged at the EA meeting, but really the logical result if you think about what a yield curve really represents). But hey, not sure that logic really factors into any of PPA anyways.

[Gary]

mwyatt,

So one difference from what you indicate and my method appears to be that my 417e calculation uses:

pv@ NRD based on the funding segment rates and then discounting back to current age based on the one applicable funding segment rate for the deferral period (that is, if deferred 17 years until lump sum payment, I was using the 2nd funding segment rate to discount the lump sum from NRA back to AA).

Where your technique seems to indicate that the pv is valued like an annuity form (i.e. for a payment made after year 20, it is discounted at the 3rd segment rate from time of payment all the way back to AA, as compared to the way I indicate above, where the payment after the 20th year is discounted at 3rd segment rate back to time of lump sum and then discounted at 2nd segment rate from NRA back to AA). Of course the 417e unisex table is used for the lump sum under 417e.

Are we on the same page?

I wasn't able to arrive at a precise technique in the proposed regs on the above issue. And if the payment is in a one-time lump sum, it would seem that the segment rate applicable to that one time payment would apply (i.e. 2nd segment rate for lump sum deferred 17 years) when discounting from time of payment back to AA.

Finally, regarding 415, I would generally apply the same approach, i,e, pv @ NRD (and then discounting from NRD back to AA) using:

1) GAR94, 5.5%

2) plan interest and mortality (in this case GAR94, 5%)

3) 105% APR using 417e

Where the lowest APR of the 3 above would be what can be applied to the 415 maximum benefit.

Now the big question (not sure if regs address explicitly):

When determining 105% of the APR using 417e, for purposes of 415, how is the APR valued?

1) The same way as done for 417e minimum present value above (which would likely be an even lower APR than the traditional 5.5%, GAR94). We have to confirm our agreement of how the 417e min pv is determined; or

2) compute pv @ NRD using 417e unisex table and the 417e segment rates, then discount from NRA back to AA using the one applicable funding segment rate (i.e. 2nd funding segment rate for lump sum deferred 17 years); or

3) another way

Thanks.

[Mike Preston]

I wasn't able to arrive at a precise technique in the proposed regs on the above issue. And if the payment is in a one-time lump sum, it would seem that the segment rate applicable to that one time payment would apply (i.e. 2nd segment rate for lump sum deferred 17 years) when discounting from time of payment back to AA.

You'd be right except for one thing: the regs require mwyatt's method.

[John Feldt ERPA CPC QPA]

This could result in a contribution that isn't big enough to cover the lump sum value. The gap between the lump sum values and the actual amount you can contribute should narrow until 2012 when this 417(e) phase-out gets rid of the 30-year treasury.

[Guest DBerg]

Gary, rightly (or wrongly), think that for funding purposes the proposed regs force you to use the funding segment interest rates for your 417 assumptions, so that if you are assuming a lump sum form of payment and your plan assumptions don't factor in, the PV would be based on the 417 unisex table and the funding segment rates (although you do get the option I believe to ignore the phase in). If yoiur plan assumptions would produce a subsidy (say in your example of 94 GAR @ 5%), think you would recognize the subsidy by calculating the value of the benefit at NRA using plan assumptions then discount back based on the funding segment rate applicable to the participant's time to retirement. If 415 is an issue, then think you would cap your projected LS payment @ NRA based upon the 415 assumptions, then again discount back using the funding segment rates.

As previously noted, there is a disconnect when applying the 417 rates for projection purposes in that the yield curve isn't projecting short term rates into the future but rather yields on varying maturity dates right now, which are two completely different animals. Given the "lock step" of these rates being the complete crystal ball allowed by the IRS, a more logical approach would at least be to calculate the PV @ NRD using the funding segment rates, assuming that your participant was at NRA right now, then discounting back using the segment rates (the double counting disparaged at the EA meeting, but really the logical result if you think about what a yield curve really represents). But hey, not sure that logic really factors into any of PPA anyways.

Hi, I'm new here and grateful this forum exists. I have to reprogram my actuarial valuation worksheets for PPA. After reading what the Regs. say, and what has been said in the meetings, I see two interpretations:

• one is a tiered approach, using all three segment rates (i.e., post-retirement) if the TOTAL benefit period is 20 years or more;
  

• the other, selects but ONE rate based on that same TOTAL benefit period.
  

So I've tentatively programmed the commutation functions to accomodate either approach. But still, it's a question of what interest rates to use, and like Mr. Wyatt, it seemed to me I'd always use the funding segment rates, not the 417(e) segment rates. You know, in that monthly table IRS publishes, like its Notice 2008-17, IRS page ar15.html http://www.irs.gov/pub/irs-irbs/irb08-17.pdf -- the second or third tables of that page, depending on whether the employer made the election.

So then I'd use the funding segment rates instead, else follow the same procedure? And ONLY the one segment rate applicable for the TOTAL period, not tiered? That's where I'm confused. I can see the claimed logic of both positions, but obviously the tiered approach will generally result in higher contributions. Thank you for whatever reply any of you in the forum, cares to make.