whipsaw question

[ERISA25]

My question is in regard to the whipsaw litigation. I was curious as to what qualification/erisa issues are raised when a court orders a plan to recalculate benefits retroactively using the whipsaw calculation (i.e., a plan that was paying the hypothetical account balance for lump sum payments is ordered to do the whipsaw calculation for such payments retroactively). Under such order, would the plan be amended to comply with the order and, if so, does that raise any other issues. If not, do you have operational failures for the new calculations? Notice to participants?

[Gary]

My initial impression is that the plan as you say is ordered to recalculate benefit according to the terms of the plan, which created the whipsaw in the first place since it was not drafted in a way that avoided the whipsaw. The plan would likely be amended prospectively to avoid the whipsaw matter in the future, so the account balance is the accurate amount of payment.

[ERISA25]

I'm just reading through a lot of these whipsaw cases and I noticed an interesting unpublished case that raised some concerns. I'm trying to determine what would happen where a court orders a rewrite of the plan with retroactive effect. i.e. a plan was paying the acct balance for years for lump sum payments and a court orders that they fix the problem through a rewrite of the plan document, so that lump sums will be paid in accordance with the 417(e) projection/discount back method for payments prior to 8/17/2006. Can you think of any title 1 or title 2 issues raised by this type of court order? It seems to me that you would have operational failures for all payments made in previous years based on acct balance.

[SoCalActuary]

I'm just reading through a lot of these whipsaw cases and I noticed an interesting unpublished case that raised some concerns. I'm trying to determine what would happen where a court orders a rewrite of the plan with retroactive effect. i.e. if a plan was paying the hypothetical acct balance for years for lump sum payments and a court orders that they fix the problem through a rewrite of the plan document, so that lump sums will be paid in accordance with the 417(e) projection/discount back method for payments prior to 8/17/2006. Can you think of any title 1 or title 2 issues raised by this type of court order? It seems to me that you would have operational failures for all payments made in previous years based on acct balance.

Mostly, I think it is very expensive to disagree with the court. That is the purpose of appeals, and it is not cheap.

In addition, I find that the rules before 2006 were: that whipsaw was the manner of applying the 417(e) rules in effect at that time.

[AndyH]

Flashforward to 2011

Takeover plan that has a document that requires that the cash balance be projected to NRD, discounted back, and the lump sum is the greater of the current balance or the pv of the annuitized balance.

Plus, the document says that optional forms of benefit are derived from the projected annuity generated from the cash balance account.

The plan was amended in 2009 for PPA but these provisions were not changed.

In practice, the current balance has been the lump sum and optional forms are an immediate annuity based on the current balance.

Can the established practice be justified through a 2011 amendment, or do past distributions need to be reviewed/revised? If so, how far back? (I'm not sure how the 2009 PPA deadline and/or the recent regulations affect this issue).

[Effen]

I think you probably need to go back and make sure the prior distributions were correct. How far? I would say the only right answer is "to the beginning".

That said this is obviously something the attorney needs to provide guidance. You shouldn't be giving any recommendations related to something you know is wrong.

[AndyH]

Agreed, thanks.

Looks like on the face of it the plan could have been amended up until 12/31/2009 to eliminate the whipsaw at least from August 2006 forward, and possibly change the annuity calculation method also. Otherwise, 411(d) relief on such changes (based on benefits accrued) seems to vanish.