417(e), 415, 430

[Effen]

Consider the following:

1) Sole plan participant has accrued a benefit equal to the 415 limit

2) Plan offers lump sums solely based on the 417(e) rates

3) Participant is at retirement age and has elected to retire during the year.

The Funding Target Segment Rates produce a liability of $1.6 million.

The lump sum based on 417(e) Rates is $1.9 million

The max 415 lump sum (5.5%) is $1.75 million

What is my Funding Target?

I know 417(e) is not relevant, but what about the 415 limit? The 430 Regs say I "must take in account" an alternative lump sum basis to the extent the value is different from the present value determine using the segment rates, but it also states that if the basis of my lump sum strictly 417(e), than I should ignore the current 417(e) rates and just use the segment rates (other than differences caused during the transition period).

So in my case I "know" the plan will be paying the 5.5% lump sum during the year, so should I consider that an "alternate basis" so that my funding target is $1.75 million and not $1.6 million?

[Andy the Actuary]

Ah, another question in the "I thought PPA was supposed to fix pension funding?" category. No where in PPA does it state, "Notwithstanding the regulations, actuaries should follow the standard code of conduct and value benefits properly." In short, I believe your FT is $1.6 million. The position of $1.75 million implies 417(e) is relevant when you said (and know) it isn't.

You can always advise the client that there is room to contribute and deduct up to whatever you believe the lump sum will actually be in conjunction with how much the client wants to contribute and the market value of assets (where you've directed current plan assets to be diversified among several mattresses).

[Mike Preston]

You must first make a decision as to what benefit is appropriate to value. Assuming you go with the lump sum, then you must value it using the greater of: a) the lump sum provisions under the plan without consideration of 417(e); and, b) the funding segment rates and 417(e) mortality; with the result just obtained limited to no more than the lump sum payable under 415.

The IRS isn't very concerned about this issue because the cushion will normally produce a range that provides for a maximum well in excess of what it would be prudent to contribute (at the high end) and if the low end produces an underfunded plan, then the client is just shorting themselves.

[Effen]

It just seems strange that if the plan's actuarial equivalent section had said the lump sum was based on the greater of 5.5% or the 417(e) assumptions, I would have a funding target of $1.75 million, but because my document only references the 5.5% stuff in the 415 section, I get a funding target of $1.6 million. Same benefit to the participant either way, but significantly different funding targets.

[Mike Preston]

The regs do not specifically address the situation where the only definition of actuarial equivalence for lump sum purposes is the 417(e) rates.

[Andy the Actuary]

CAUTION: Avoid at all costs doing what makes sense.