Valuation Funding; Lump Sum Assumed

[JAY21]

If a Valuation assumes the payment form will be lump sum distributions, and the plan's actuarial equivalence used 7.5% pre and post retirement interest rates (84 UP table), do I fund using those interest rates while substituting ONLY the 417e mortality table for the mortality funding table ?

Or do I need to also assume some different interest rates other than the 7.5%, like the 430 interest rates or even the 417e interest rates ?

Thanks for the input.

[Andy the Actuary]

Greater of lump sum @7.50% discounted at appropriate segment rate from time of payment versus 430 rates and applicable mortality table (post distribution).

[david rigby]

As Andy says (and assuming the plan is subject to ERISA), the plan cannot pay a lump sum based on UP84/7.5% unless that amount is greater than the LS based on the 417 interest and mortality. Thus, what you assume in the valuation should reflect the actual plan provisions.

[SoCalActuary]

As Andy says (and assuming the plan is subject to ERISA), the plan cannot pay a lump sum based on UP84/7.5% unless that amount is greater than the LS based on the 417 interest and mortality. Thus, what you assume in the valuation should reflect the actual plan provisions.

Well, sort of true. The IRS funding rules are a cobbled sort of method, with 417 mortality and 430 interest, where the 417 interest rates for at least the first year are already known but ignored. But I certainly agree that the assumed lump sum should not be based on the UP84/7.5% rates.

[JAY21]

Andy, is the segment rate discount in the first part of your response based upon the 430 segment rates (lump sum at 7.5% discounted at appropriate segment rate) ?

Thanks.

[Andy the Actuary]

Andy, is the segment rate discount in the first part of your response based upon the 430 segment rates (lump sum at 7.5% discounted at appropriate segment rate) ?

Thanks.

Yes, the 430 rate. So, for example, if age 45 and lump sum at 7.5% at age 55, then you'd use the 6-20 430 segment rate to discount lump sum back to age 45.

This methodology was covered in the attached proposed regs. from 2007.

IRS_Proposed_Funding_12_28_2007_REG_139236_07.pdf

[JAY21]

Can I ask one more scenario (which I do have as well). If the plan doc actuarial equivalence is ONLY the 417e assumptions (not greater of 417e and some other assumptions) then would the comparison for funding be the GREATER of:

1. 417e mortality table with 417e rates use for annuity factor at NRA but discounted pre-retirement to current age at 430 rates

2. 417e mortality table with 430 rates.

Would this be correct ?

Seems a bit odd to use both 417e rates and 430 rates in item #1 above so maybe I don't have that right.

Thanks for the help.