417(e) rates

[Belgarath]

I'm not sure if this is related to Andy's question earlier, which is why I'm posting it separately.

A DB plan with an early retirement subsidy is terminating. The plan was frozen in 1994 if that makes any difference.

When calculating the lump sum, is there any reason that you would NOT apply 417(e) rates to a lump sum where there is an early retirement subsidy?

I don't have a scrap of information to go onj other than what I've just posted, so this may be unanswerable without seeing what the document says, etc., but I thought I'd give the question a shot to see if it is a simple yes or no.

Thanks!

[FAPInJax]

I'm not sure if this is related to Andy's question earlier, which is why I'm posting it separately.

A DB plan with an early retirement subsidy is terminating. The plan was frozen in 1994 if that makes any difference.

When calculating the lump sum, is there any reason that you would NOT apply 417(e) rates to a lump sum where there is an early retirement subsidy?

I don't have a scrap of information to go onj other than what I've just posted, so this may be unanswerable without seeing what the document says, etc., but I thought I'd give the question a shot to see if it is a simple yes or no.

Thank

Well, the key question here is whether the lump sum includes the early retirement subsidy (a plan document issue). Presuming that it does, or you would not have asked the question, the 417(e) rates would apply to early retirement lump sum. For example, a 52 year old with a retirement age of 62 could have a lump sum calculated beginning at 62 (starting in the second tier of interest rates) OR 55 (assuming early retirement at 55, lump sum of early retirement) and now would have several years at the first tier of interest rates.

[Andy the Actuary]

The rules appear to differ when the Plan is terminating, at least as far as I can smell. See attached.

IRS Rev. Rul. 85-6 Early Retirement Subsidy Termination.PDF

[Belgarath]

I'm so confused...

I was able to take a look at the plan language. It is Sungard/corbel plan language. There's an early retirement benefit in Section 5.1(b) of the document, and the "regular" benefit in 5.1© of the document. In Section 5.7(b), which discusses benefits in a different form than a life annuity, it clearly states that the benefit, available in several forms including a lump sum for a standard plan termination, is based upon the actuarial equivalent of the monthly retirement benefit from 5.1©.

Since 5.1© is NOT the subsidized early retirment benefit in 5.1(b), this would seem to indicate that for this purpose, you wouldn't have to apply 417(e) rates to the SUBSIDIZED lump sum benefit, but only to the "regular" unsubsidized lump sum benefit?

I'm not sure there's any 411(d) issue here - the participant still has the option to take the subsidized early retirement benefit as an annuity payment. It's just whether for lump sum purposes, the lump sum must be calculated in the subsidy, or just the regular benefit.

With what passes for "logic" - and I use that term very loosely - with me, it seems counterintuitive that you apply 417(e) rates to a lump sum based on the "regular" benefit, but would not do so on the subsidized benefit. But that seems to be where this is heading?

[AndyH]

Belgarath, It sounds to me like the subsidy is not required to be included in the lump sum in this particular case.

Andy, I don't see the revenue ruling that you cited as affecting the lump sum. If a participant makes a benefit choice, and establishes a benefit option and current annuity starting date at time of termination, I think the Revenue Ruling no longer applies by choice of the participant. I believe that it is when the participant defers an choice, such as through default to a deferred annuity, that the subsidy needs to be built in to the future annuity, either as managed/administered by the insurer or by outright granting, through plan amendment, the terms that the participant would have had to meet, e.g. x years of service.

[chc93]

We've had DB plans go both ways. One was the 417e lump sum equivalent of the subsidized early retirement benefit at the current (early retirement) age, and another was the 417e lump sum equivalent at current age of the accrued benefit at NRA. Plan documents were different.