Benefit Calculation and Funding -- Re: 415

[Andy the Actuary]

Any comments would be appreciated as to whether this makes sense

Facts:

NRA=62

AA=50

Accrued Benefit $195,000 (10+ years of participation)

Lump sum available as deferred annuity at NRA

Suppose terminating employment.

Then, contend lump sum is computed as $195,000 x (f)

(a) N62/D50 using plan rates

(b) N62/D50 using 417(e) rates

© Greater of (a) and (b)

(d) 105% x (b)

(e) N62/D50 computed using applicable mortality table and 5.50%

(f) Least of ©, (d), and (e)

Suppose funding (assume no pre-retirement mortality). Then, FT computed as $195,000 x (f) / (1+second segment rate)^12

(a) N62/D62 using plan rates

(b) N62/D62 using funding segment rate 2 for the first 8 payments and funding segment rate 3 therafter

© Greater of (a) and (b)

(d) 105% x (b)

(e) N62/D62 computed using applicable mortality table and 5.50%

(f) Least of ©, (d), and (e)

[Blinky the 3-eyed Fish]

Quick answer:

Terminating: 1) didn't WRERA remove the 105% limitation?; 2) I assume you are highly simplifying the 417(e) segment rates calculation on purpose.

Funding: 1) same comment about the 105% for 2009+ valuations

[Andy the Actuary]

(1) WRERA

SEC. 122. MODIFICATION OF INTEREST RATE ASSUMPTION REQUIRED

WITH RESPECT TO CERTAIN SMALL EMPLOYER PLANS.

(a) IN GENERAL.—Subparagraph (E) of section 415(b)(2) of the

1986 Code (relating to limitation on certain assumptions) is

amended by adding at the end the following new clause:

‘‘(vi) In the case of a plan maintained by an eligible

employer (as defined in section 408(p)(2)©(i)), clause

(ii) shall be applied without regard to subclause (II)

thereof.’’.

(b) EFFECTIVE DATE.—The amendment made by this section

shall apply to years beginning after December 31, 2008

So, thank you for calling this to my attention. This removes the 105% for the small plan sector.

(2) Yes, the 417(e) calculation was symbolically presented. Basically, all payments would be discounted using the appropriate segment rate corresponding to their duration. For funding, I was suggesting in the example that you calculate the greater of the Plan Rate and 417(e) rate at 62, and assuming the Plan Rate produces the greater annuity, you discount the Plan Rate at 62 to the present using the segment rate. For purposes of calculating the 417(e) rate at age 62, the duration for applying the appropriate segment rate would be measured from (in my example) age 50 rather than from age 62. E.e., the payment at age 63 would be discounted using the second rather than the first segment rate. Does this make sense. Am I making this too difficult??

Thank you for your help.

andy t.a.