QJSA Most-Valuable Rule vs. Grandfathered Lump Sum

[Übernerd]

Plan A is a traditional, Taft-Hartley DB plan with an elective lump sum payment (LSP) option. In PY 2008, Plan A implemented the new PPA 417(e) rates. The amendment included an odd wear-away rule. Now we're concerned about that rule in light of the general rule that QJSA must be at least as valuable as any other benefit option that is payable at the same time (the most-valuable rule or "MVR").

Under Plan A's wearway rule, minimum LSPs are based either on (i) "frozen" service, i.e., service through a fixed date, using pre-PPA 417(e) factors; or (ii) the e'ee's total service, using post-PPA factors. The "freeze" date is the end of the 2009 PY. So a participant with 10 years of service as of the freeze date, who then retires at the end of the 2010 PY, would get the greater of the LSP calculated using:

(i) his

10

years of service through the end of PY 2009 and the

pre

-PPA factors, or

(ii) his service through the end of PY 2010 (

11

years) and the

post

-PPA factors.

Whether it was substantively permissible or not, the amendment was timely adopted during the transition period described in Notice 2008-30, and the dates line up with the period during plans were permitted to pay the greater of the LSP payable using pre- or post-PAA factors, without violating the MVR. The idea was simply to give participants a window to see what the rate would be for the upcoming stability period and then decide whether to retire and take the old LSP.

Note that Plan A adopted an identical wear-away under the relief issued after the transition from the old PBGC factors to the GATT factors in 2000, and the IRS has issued favorable determinations following both amendments.

The critical points of the law are:

QJSA Most-Valuable Rule: A qualified joint and survivor annuity must be at least the actuarial equivalent of the normal form of life annuity or, if greater, of any optional form of life annuity offered under the plan. § 1.401(a)-11(b)(2).

417(e) Exception: A plan does not fail to satisfy the [MVR] merely because the amount payable under an optional form of benefit that subject to the minimum present value requirement of section 417(e)(3) is calculated using the applicable rate (and, for periods when required, the applicable mortality) under section 417(e)(3). § 1.401(a)-20, Q&A 16.

PPA "Greater-of" Transition Relief: Expired at the end of the 2009 plan year. Notice 2008-30, Q&A 16.

No one foresaw what would happen to interest rates, however, and the result is that the frozen LSPs, which are calculated using pre-PPA factors, are still greater than the all-service LSPs calculated using post-PPA factors. It looks to me like there's a problem here, because the frozen LSPs are more valuable than the currently-payable QJSA.

Does anyone see this differently? A different answer is greatly to be desired at this point.

Cheers.