MAP 21 and Lump Sum Assumption

[Craig Jacobs]

For a traditional annuity plans that pays lump sums under 417(3), the regs had indicated that the lump sum conversion basis in your valuation should equal the funding segment rates. So for a 1/1/2012 valuation using a September lookback, the lump sum conversion basis and the funding segment rates are both set to be equal to 2.06% 5.25% 6.32%.

Does that still apply under MAP 21. So for a 1/1/2012 valuation for a sponsor that elects to take advantage of MAP 21, would the lump sum conversion basis be 5.54% 6.85% 7.52% (same as the 2012 funding segement rates)? If not, then MAP 21 would not have a significant impact for a plan that pays 100% lump sums at decrement.

Obviously none of this would impact the actual amount of benefits paid since those would still be determined under 417(e).

Thanks

[FAPInJax]

This is to be answered by regulations.

Well, the ‘old’ way was to value lump sums using the funding segment rates and the applicable mortality table OR the AE (whichever was greater).

MAP 21 throws a monkey wrench into the calculations. The segment rates are replaced BUT it is NOT assured that the same methodology holds (due to the relationship between the funding segments and the 417(e) segments being broken).

I believe that until the IRS issues some regulations that it is not possible to value lump sums for valuation purposes. One would think they would maintain the same logic but it does not make sense to presume the MAP 21 rates represent future 417(e) rates. Obviously, most small plans would experience that the AE would rules for lump sum purposes but that also does not make sense because we all know lump sums are being paid out under 417(e) rates.

There is no protection for the actuary (good faith) at this time IF an AFTAP and / or MRC is produced IF the IRS comes up with regulations requiring a more complex method (which produce a higher MRC and / or lower AFTAP).

[Andy the Actuary]

What would be your rationale for not using the MAP-21 rates? There appears -- the best that my eyes can read -- to be no indication in the law that you wouldn't use the MAP-21 rates for valuation of minimum lump sums. Again, despite FAPInJax's argument about the broken linkage making sense, where are the words to support the position?

Taking a step further, the linkage was often illusory at best: The lump sum interest rates my have no relationship to the funding rates. For example, take a plan that varies lump sum interest rate by month and determines the funding segment rate as the fourth preceding month (e.g., September). The lump sum in December 2012 might be based upon the November 2012 segments whereas the valuation was based on September 2011 segment rates. The 24-month averaging of yield curves to determine valuation but not lump sum rates also creates a discontinuity.

Looks like we're headed into two-actuaries-three-opinion territory.

P.S. If FAPInJax's position is right on (and I'm not saying it's not), then the IRS busting their chops to get MAP-21 rates published certainly did not benefit the general good!!! That is, you wouldn't be able to adjust 3rd quarterly installments.

In my concern over this issue, I contacted a senior actuary at a national firm I used to work for (when it was Tillinghast, Nelson & Warren). The actuary indicated they discussed the issue raised by FPJX but that the firm's national position was that the MAP-21 rates applied when valuing minimum lump sums. That is, simply use the MAP-21 rates and the applicable mortality table.

[Effen]

I will agree with Andy on this one. Based on my discussions with the IRS, they don't like the annuity substitution rule, but they acknowledge that it is the rule and therefore you don't really have any choice until they change the rule.

It is very possible the rule may change, but with elections looming, don't hold your breath before sometime late 2012 or early 2013 depending upon who wins. Then again, this is getting a lot of discussion, so they could rush out some informal guidance much sooner.

That said, I would still caution clients of the disconnect between the two rate structures and make sure they know they may not be adaquately funding their plan if they only contribute the minimum using MAP-21 rates.

[Andy the Actuary]

I will agree with Andy on this one. Based on my discussions with the IRS, they don't like the annuity substitution rule, but they acknowledge that it is the rule and therefore you don't really have any choice until they change the rule.

It is very possible the rule may change, but with elections looming, don't hold your breath before sometime late 2012 or early 2013 depending upon who wins. Then again, this is getting a lot of discussion, so they could rush out some informal guidance much sooner.

That said, I would still caution clients of the disconnect between the two rate structures and make sure they know they may not be adequately funding their plan if they only contribute the minimum using MAP-21 rates.

(1) As far as the IRS not liking the "annuity substitution" rule, it was their Effen rule. If they don't like eating peanut butter and jelly sandwiches, they should quit making them.

(2) One would have to believe that the IRS wouldn't issue guidance that retroactively created penalties, especially after they issued the MAP-21 rates without this caveat so that employers could take advantage of the new law and start taking smaller tax deductions. In fact, Notice 2012-55 spoke only of "including guidance relating to be benefits restrictions and transition issues."

(3) On the other hand, I agree with Keith (since he agreed with me) that some sort of couching is in order. However, clients pay us money for advice and the more we caveat, the more useless the advice. To tell me as a plan sponsor that I can use the MAP-21 rates but that the IRS may come back later and determine that I've not adequately funded the plan is unsettling. You have given the client the Hobson's Choice of assuming some unknown and unquantified risk versus reducing contributions. IMHO, there are few clients who would understand the "disconnect" issue. And to be frank, I hadn't considered it until FJ raised the issue.

Perhaps, a general caveat such as "As in the case of all pension legislation, there are numerous issues related to the implementation of MAP-21 for which the IRS may issue guidance or technical corrections. In particular, some actuaries are concerned that the IRS has issued no guidance regarding whether or not MAP-21 changes the way potential lump sums are valued for funding valuation purposes as new law may be inconsistent with pre-MAP-21 IRS regulations that affect the valuation. Since the MAP-21 language neither addresses this issue nor suggests the contrary position, I am comfortable with the position that MAP-21 changed only the funding interest rates and not the valuation methods and procedures. If the IRS later directs to the contrary, we (and a lot of other plan sponsors and actuaries) will have to amend the valuation and deal with any funding issues. The alternative is to defer implementation of MAP-21 until the IRS issues further guidance (if they issue any guidance in the discussed area). Delaying implementation is clearly contrary to Congress's intent who provided for the new law to apply in 2012."

[Andy the Actuary]

Assuming I'm incorrect* and that the IRS, indeed, will issue regulations that replace the 2009 final regs regarding 430 treatment of lump sums, it would make sense that such regs would not apply for 2012 Plan Year: To apply for 2012 but only if MAP-21 rates are used would be incongruous. To apply for 2012 regardless of whether MAP-21 is implemented and retroactively presumably could produce higher contributions which could mean that for some employers who got the work done early in 2012, 2012 quarterly contributions made to date could be in arrears though the client acted in good faith.

*The following paraphrasing was related to me by more than one large consulting firm: On August 23, members of major consulting firms met with the IRS/Treasury. "They" expressed that while no decisions have been finalized, "they" are clear in their thinking to change the way lump sums should be valued for funding. The impression is new regulations would severely dampen if not eliminate the impact of funding stabilization. They would revoke the "annuity substitution" rule delineated in the October 2009 final regs. and would impose a new set of proxy lump sum rates based upon expected spot interest rates to value the underlying annuity upon which the lump sum is based. The lump sum, then, would be discounted back at the appropriate MAP-21 rate.

[Andy the Actuary]

I understand the IRS/Treasury is being bombarded by requests not to eliminate or otherwise revise the "annuity substitution" rule. It's hopef that someone would pose the question of whether or not revision of the reg was on their agenda prior to Congress's introduction of the MAP-21 pension stabilization provisions.