Is it necessary to grandfather present values?

[Guest Navysalad]

I've been semi-retired for a few years, just now getting back in the game, and am a little rusty about the rules that apply when a present value basis is changed.

We've got a new client that is using the old (pre-1999 or something like that?) rule for calculating lump sums via 100% (up to $25,000) or 120% of the PBGC rate, together with UP84 mortality as the primary basis for determining lump sums. Once that amount is calculated, they then compare to the PPA segment rates with applicable mortality, and the highest amount wins.

They'd like to get rid of the old method and just go by the PPA present value. My question is -- assuming someone gets a higher PV from the old formula, to what extent must that be grandfathered? One consultant told me you had to grandfather the old basis for one year, but could not give me a cite. In my experience, I can't recall needing to GF present values. It would be surprising that, if it IS necessary to GF the PV, that there would only be a one year period.

Can anyone shed any light on this? Citations appreciated.

[Guest Quagmire]

I've been semi-retired for a few years, just now getting back in the game, and am a little rusty about the rules that apply when a present value basis is changed.

We've got a new client that is using the old (pre-1999 or something like that?) rule for calculating lump sums via 100% (up to $25,000) or 120% of the PBGC rate, together with UP84 mortality as the primary basis for determining lump sums. Once that amount is calculated, they then compare to the PPA segment rates with applicable mortality, and the highest amount wins.

They'd like to get rid of the old method and just go by the PPA present value. My question is -- assuming someone gets a higher PV from the old formula, to what extent must that be grandfathered? One consultant told me you had to grandfather the old basis for one year, but could not give me a cite. In my experience, I can't recall needing to GF present values. It would be surprising that, if it IS necessary to GF the PV, that there would only be a one year period.

Can anyone shed any light on this? Citations appreciated.

There was a period of time after PPA when the IRS allowed 411(d)(6) relief and pre-PPA lump sum factors could be eliminated. However the period has expired, so at this point any plan that did not eliminate its pre-PPA factors must continue to use them with regard to benefits that have already been accrued. A plan could shift to using PPA lump sum factors for future benefit accrual only, and provide the sum of the two lump sums. A specific amount of lump sum is not 411(d)(6) protected, only the factors. In general, see http://www.regulationdocs.com/regulations/26cfr/1.417(e)-1/ and Notice 2008-30.

[ishi]

The grandfathering you describe is the A+B approach, where A is the lump sum of the accrued benefit on the date of change using old assumption methodology, and B is the lump sum of the benefit earned after the date of change using new assumption methodology. Could you also use a "wear-away" grandfather, where the subsequent lump sum is the final accrued benefit using new assumption methodology, but not less than the lump sum of the accrued benefit on the date of change using old assumption methodology? In both cases, the lump sum assumptions are determined at the future date of distribution.

[Guest Quagmire]

The grandfathering you describe is the A+B approach, where A is the lump sum of the accrued benefit on the date of change using old assumption methodology, and B is the lump sum of the benefit earned after the date of change using new assumption methodology. Could you also use a "wear-away" grandfather, where the subsequent lump sum is the final accrued benefit using new assumption methodology, but not less than the lump sum of the accrued benefit on the date of change using old assumption methodology? In both cases, the lump sum assumptions are determined at the future date of distribution.

Theoretically you could use a wear-away, although at some risk of restarting the entire age discrimination brouhaha that plagued cash balance plans for years. Given the way that finally was put to bed by most courts (and ultimately by PPA) it's doubtful that any plaintiff's attorney would be interested in revisiting the question, especially since the period of wear-away in this case would likely be short. So, yes, I think you can, especially since we're not talking about benefit accrual, merely the value of an optional form other than the QPSA.