Change to PPA 417(e)

[Penman2006]

I have a DB plan document that defines AE as the pre-PPA 417(e) basis for everything, lump sums and converting to optional forms. It defines the Applicable Interest Rate as the 30 Year Treasury Rate and the Applicable Mortality Table as the prevailing commissioner's standard table per Code Section 807(d)(5). The plan pays full lump sums upon termination of employment.

I have read Revenue Ruling 2007-67 and IRS Notice 2008-30 and particularly per Notice 2008-30 Q&A 18 it seems clear that the plan sponsor can switch to the PPA 417(e) basis for both calculating lump sums and for annuity conversions without grandfathering anything.

Agree or disagree?

[Guest pensioneer]

There is a condition - PPA 1107 requires an amendment be adopted by end of 2009 plan year and that the plan must have operated under PPA since the effective date of the legislation and be retroactive in order to gain 411(d)(6) relief for such a change. Otherwise, Q&A 16 and 17 in 2008-30 gives you a way to grandfather in the transition by offering the "better of" amount between pre-PPA and post-PPA for a specified period of time.

Also, 2007-67 states that the timing rules from 1.417(e)-1(d)(4) and 1.417(e)–1(d)(10)(ii) are still effect.

[Penman2006]

Pensioneer, based on your first sentence I think you are talking about just operating the plan under the PPA 417(e) basis without an amendment. They paid one person out in 2008, and that was based on the greater of pre-PPA and PPA rates. What if they adopt the PPA 417(e) amendment effective immediately, wouldn't that allow them to avoid any grandfathering for either lump sum or annuity options going forward from the adoption date? Also, they would not be changing the lookback or stability period.

[Blinky the 3-eyed Fish]

All you have to do is adopt the PPA amendment timely in order to not have to grandfather the old 417(e) mortality and rates. You could adopt it now or adopt it by the deadline. Either way doesn't matter.

You say a 2008 distribution was paid on the greater of old and new. That was not necessary, athough because it was done that way, you should make sure your PPA amendment accounts for that.

[Guest pensioneer]

I would read 1107 very carefully, because it only grants 411(d)(6) relief if the plan has been operated in the same manner as the amendment specifies since the legislation was effective and is retroactive. Since you already have given a distribution that was different than the new PPA 417 method, you probably have to follow the method of phasing out the Pre-PPA as described in Q&A 16 and 17 of 2008-30. My understanding is that you would be able to set a transition time that way and get full relief. I think that's what blinky may be referring to when by "because it was done that way, you should make sure your PPA amendment accounts for that."

2008-30

A-17. In general, relief under § 1107 of PPA ’06 applies to an amendment that provides the more favorable to participants of an amount calculated by using the pre-PPA ‘06 applicable mortality table and pre-PPA ‘06 applicable interest rate or an amount calculated by using the post-PPA ’06 applicable mortality table and post-PPA ’06 applicable interest rate, even if the pre-PPA ’06 applicable interest rate and/or pre- PPA ’06 applicable mortality table apply only for a specified period of time (as long as the amendment is adopted during the period established in § 1107(b)(2)(A) of PPA ’06). For example, if a plan is amended to provide that the amount payable under an optional form of benefit that is subject to the minimum present value requirements of § 417(e)(3) is calculated in the manner described in Q&A-16 of this notice (i.e., pursuant to a better of calculation) for a specified period of time, and thereafter is calculated without reference to the pre-PPA ’06 applicable mortality table and pre-PPA ’06 applicable interest rate, the plan will not fail to satisfy the requirements of § 411(d)(6) by reason of the amendment.

[Guest VEBAPLAN]

All you have to do is adopt the PPA amendment timely in order to not have to grandfather the old 417(e) mortality and rates. You could adopt it now or adopt it by the deadline. Either way doesn't matter.

You say a 2008 distribution was paid on the greater of old and new. That was not necessary, athough because it was done that way, you should make sure your PPA amendment accounts for that.

not correct

[david rigby]

not correct

For such a statement, it is reasonable to expect an explanation.

[Mike Preston]

Well, I'll play devil's advocate here and side with Lance in one respect. While the IRS may allow one to adopt an amendment later than might otherwise be expected, we have yet to see a court case dealing with a participant's ERISA rights in such a circumstance. While I wouldn't be so bold as to say "not correct", I might say that a court might find that an amendment shouldn't be given retroactive effect to the extent it reduces benefits retroactively. Obviously, nobody is sure one way or the other since I don't think the issue has been litigated, but if that is Lance's opinion, at least it isn't too far fetched.

Now, expecting an explanation from Lance might be the quintessential definition of far fetched.

[Andy the Actuary]

quintessential

Five diapers?

[Penman2006]

I subscibre to one of the larger plan document providers and in the cover page to their PPA 417(e) amendment they say that until the amendment is adopted that the plan sponsor must pay out based on the larger of the pre PPA 417(e) basis and the PPA 417(e) basis.

As I mentioned in my initial post I now think that is incorrect.