Transition to GATT lump sums

[nancy]

If a plan sponsor has not adopted an amendment to pay lump sums at GATT rates, should we continue to pay at the greater of GATT or PBGC in 2000 until the plan is amended? Or should we begin to only pay at GATT?

[Guest]

If your Plan is not amended prior to the 2000 year, you MUST pay the greater of the PBGC or GATT rate. In addition, once you cross into the 2000 Plan year, you no longer have 411(d)(6) protection so if / when you do change to GATT rates and you can't do it instantaneously, but must transition into it over a 1 year period.

[Guest garvey_agg]

A client with a pre-GATT DB plan has used GATT rates to calculate benefits since 1/99. By what date must the GATT amendment be signed?

Rev.Proc. 99-23 seems to say that the client has until the end of the 2000 plan year, but my understanding is that the Nov. 1999 ALI/ABA seminar materials indicate otherwise.

[Guest]

My understanding is that if you have a "pre GATT" plan, in order to use the GATT rates, you must amend your plan. Therefore if you have been using GATT rates since 1/99, your Plan should have been amended prior to 1/99.

I don't think the change to the GATT rate falls into the remedial amendment period that would allow you a retro active effective date.

[Alonzo]

Rev Proc 99-23 says the following:

"Finally, the extension of the remedial amendment period also applies to the time for adopting amendments of defined benefit plans to provide that benefits will be determined in accordance with the applicable interest rate rules and applicable mortality table rules of §1.417(e)-1(d). Thus, such a plan amendment may be adopted at any time up to the last day of the extended remedial endment period, provided the amendment is made effective for distributions with annuity starting dates occurring in plan

years beginning after December 31, 1999. However, pursuant to the Commissioner’s authority in §1.401(B)-1T©(3), if such a plan amendment is adopted after the last day of the last plan year beginning before January 1, 2000, the amendment must provide that, with respect to distributions with annuity starting dates that are after the last day of that plan year but before the date of aoption of the amendment, the distribution will be the greater of the amount that would be determined under the plan without regard to the amendment and the amount determined under the plan with regard to the amendment."

In English, that means your understanding is correct, Gary.

I'm curious about Kieth N's statement that you have to grandfather the PBGC rate for a year, if you adopt after 2000. That 1 year rule in the GATT regs applies applies to the change in time of determining the interest rate, not the conversion from PBGC to GATT. And the paragraph I just quoted seems to allow for elimination of the PBGC rate after 2000.

[Gary]

My understanding is that if you do not amend your plan for GATT, then you continue to use the PBGC rates through the 1999 plan year. Then beginning with the 2000 plan year, you are required to use GATT rates operationally, even if you haven't drafted an amendment. I'm curious to hear other views on this.

[John A]

Alonzo, wouldn't "the amount that would be determined under the plan without regard to the amendment" mean the greater of the amount using the PBGC rate and the plan rate? From this wording, it certainly appears that, until the amendment is adopted, a plan would have to use the greater of the benefits determined using the plan rate, the PBGC rate, or the GATT rate.

[Guest Ed F]

For PYs beginning on/after 1/1/2000, if your plan has not yet been amended for GATT the GATT basis must serve, operationally, as the "floor" so that if the terms of the Plan result in a larger lump sum, use that. You have until the end of the remedial amendment period to amend for GATT, but the GATT change--unlike some other changes, like the increase in the lump sum cashout threshold to $5,000--can't be retroactive. This means that when you get around to amending for GATT, the amendment must provide that for the period beginning 1/1/2000 and ending on the effective date of the amendment, the lump sum is the greater of the lump sum using the Plan's factors, and the lump sum using the GATT rates.

Going forward, lump sums can be based on the GATT basis alone if the amendment is adopted before the end of the remedial amendment period, and if all you do is substitute the GATT rate for the PBGC rate. You get 411(d)(6) protection so long as the Plan doesn't currently use a bifurcated rate (e.g., lums sums are the greater of the lump sum based on PBGC rates, or 7%). If the Plan uses a bifurcated rate, then you can't get rid of the non-PBGC rate (in my example, the 7% rate) under the special GATT 411(d)(6) transition relief rule. You'll have to adopt some kind of wear-away rule or use some other transition rule available under the 417(e) regs.

[Gary]

Reponding to what Alonzo said. It appears that he is saying that if the amenment is not adopted by 1/1/2000 then the plan would be required to use greater of PBGC rates or GATT rates. My initial reaction was that simply the GATT rates would be a required minimum eventhough the amendment was not adopted. Do I stand to be corrected? I'll do some research myself.

[Guest]

My understanding comes from what I'm pretty sure Jim Holland said during the fall ALI-ABA teleconference. The logic goes something like this. If the Plan contains the PBGC Rate as a minimum lump sum, and doesn't amend for GATT prior to 1/1/2000, then the GATT Rate does becomes the minimum, BUT, the since the PBGC was not taken out, it also is treated as another minimum which because it wasn't removed during a period of 411(d)(6) exemption, is now protected by 411(d)(6) and can't be taken out without going through a 1-year transition. I'm not exactly sure where this transition rule is, but it has more to do with the changing of actuarial equivelants for lump sums than just the removal of the replacement of the PBGC rate with the GATT rate.

This transition may be no big deal for an ongoing plan, but if a Plan wanted to amend to GATT & terminate, it may be stuck with the PBGC rate for lump sums, at least for one year.

I'm not sure if I'm just kicking a dead horse, but It seemed like Gary still had some question.

I will try to find a site on the transition.

[Alonzo]

The PBGC to GATT transition can be moderately complicated or extremely complicated, based on whether you are changing the time for determining the interest rate by more than two months (and whether you are switching to monthly determination of the GATT rates). Assume that it is July 2000. I do PBGC rate as of the beginning of the year. On 7/1/2000, I execute the amendment switching to GATT (using the November as my determination date), effective January 1, 2000. Based on the IRS Notice and 1.417(e)-1(d)(10)(iv) Calculations should be:

PBGC Int & Plan mortality -- up to 12/31/99

Greater of GATT int & mortality and PBGC int & mortality -- 1/1/2000 -- 6/30/2000

GATT int & mortality 7/1/2000.

Now, let's assume my plan has used PBGC rates in effect on the annuity starting date to determine benefits and I want to switch to an October determination date. Based on the IRS notice and 1.417(e)-1(d)(10)(ii), (v) and (vi)©, the calculation is this piece of ugliness:

PBGC & plan before 2000

1/1/2000-7/1/2000 -- The better of PBGC & Plan; GATT int & mortality one or two months before the annuity starting date; GATT int & mortality as of 10/99

7/1/2000 - 6/30/2001 The better of GATT int & mortality one or two months before the annuity starting date; GATT int & mortality as of preceding October

7/1/2001 and after GATT int & mortality as of preceding October

(All this assumes a calendar year plan year, incidentally.)

[Guest]

Still kicking that horse.....

From page 49 of the materials used in the Fall ALI-ABA teleconference: "Until an

amendment is actually adopted, a plan may not apply the GATT actuarial assumptions if

those assumptions would reduce the benefit from the value as determined under the

current terms of the plan. In addition, the one-year transition rule does not begin running

until the later of the date of adoption or the effective date of the amendment implementing

GATT. For example, if a plan that currently uses PBGC actuarial assumptions is

amended on July 1, 2000, effective as of the same date, to implement the GATT actuarial

assumptions, and the time for determining the interest rate is also changed, the (1) the

PBGC assumptions must be used for distribution prior to July 1, 2000 if they produce a

larger benefit than the GATT assumptions, and (2) the "one year transition rule" would

need to be in effect through tat least June 20, 2001. Thus, plans generally should be

amended before the beginning of the 2000 plan year to implement the GATT changes."

So I guess your right, it is a phase in issue, so would that mean that you could amend for

GATT in July 2000, as long as your July amendment called for the beginning of the year

(ie: Nov or Dec 99) GATT rate you would be ok?

[Guest Keith N]

Ok, it's 7 months later and I've confused myself again. If I am now (7/1/01) changing my PBGC based lump lum calculation to a GATT based calculation do I have to phase it in over a 1 year period? I thought I did (obviously) but I can't find a site and I'm thinking that I don't have to since I'm still in the remedial amendment period.

This stuff drives me nuts!

[Blinky the 3-eyed Fish]

You do not have to grandfather the PBGC rate. I don't have the cite offhand, but if I locate it, I will edit my post.

[david rigby]

Grandfather, no. Greater of, yes.

For all lump sums paid between the first day of the plan year beginning in 2000 and the date of adoption, the lump sum must be the greater of the GATT amount and the basis contained in the plan. As soon as the amendment is adopted, this requriement goes away.

[Gary]

ok, back to the future again with this subject.

say a plan has not been amended for gatt yet and they decide to amend on 6/1/2002 for gatt.

w/r/t 411(d)(6) protection.

1. clearly, until the plan is amended, the pbgc rates that are currently in the plan must be used as a minimum, along with gatt.

2. after the plan is amended.

1.417(e)-1(d)(10)(i) seems to indicate that 411(d)(6) protection is only afforded if the amendment is adopted before 1/1/2000 for calendar year plans. this is how the reg seems to read as of 1/1/2002.

to me this seems to mean that if the amendment is not adopted by 1/1/2000, then the pbgc rates would need to be protected permanently.

like to get other thoughts on this reg and why it seems to ignore rev proc 99-23.

99-23 that seemed to imply 411(d)(6) could be afforded if the amendment was made by 12/31/00.

then there are those who say that once you adopt the gatt amendment, the pbgc rates are no longer required at all.

then others talk about a 1 year transition after the amendment is adopted.

any new thoughts out there on this?

gary

[Mike Preston]

Doing my best Richard Hochman here: "Whhaaaaat?"

You didn't like my last response in this other thread:

http://benefitslink.com/boards/index.php?showtopic=14849

[Guest meggie]

My question "piggy back's" on Gary's analysis . I was of the school of thought that you had to adopt GATT by the end of the 2000 plan year ( and not later than that) otherwise the plan would be stuck with 2 calculations under 417(e)- PBGC and GATT. To take that a step further, I believed that if a plan wanted to remove the PBGC basis in py 2001 or any time later, then would have to deal with 411d protection rules, so the PBGC basis would not automatically go away. I tied this rationale to Rev Proc 99-23 and 1.417(e)-1(d)(10).

I'm now being challenged by my co workers on the above analysis- some are adamant that as long as GATT is adopted in conjunction with the GUST restatements (i.e. 2001 or even 2002 if filing in 2002), then there is still 411d relief, meaning the PBGC basis goes away after the date of adoption. The only way I can get to their conclusion , is if I interpret the extended GUST remedial amendment period as defined in Rev Proc 2001-55 to also be extended to when GATT needs to be adopted and the old statutory basis (PBGC) may be removed without violating 411d.

Any thoughts would be greatly appreciated!

Thanks

[Gary]

meggie,

that is exactly my understanding.

in other words, it appears that prototype plans for eg. have until the end of 2002 for a calendar yr plan to amend for gust, inclusive of gatt. so you must use pbgc and gatt until the amendment is adopted and then if the amendment is timely, you can remove pbgc without violating 411d6.

gary

[Mike Preston]

Somehow I still think the reg is clear and has not been updated. Hence, the only way you get 411(d)(6) protection with respect to a lookback period of more than 2 months is if the amendment was adopted before 12/31/1999. I don't see anything in RP 99-23 that changed this.

[Gary]

w/r/t mike's comments, i think alonzo's thread addresses it best.

i.e. 99-23 seems to indicate (as did alonzo's thread) that 411d6 is given after the amendment is adopted, subject to the one yr transition in some cases.

the reg in 1.417 does indicate a 12/31/99 deadline to amend and be afforded 411d6 relief. and i would have hoped that the reg were updated to be cocsistent w/ 99-23, but it isn't. so i do think that this issue isn't as definitive as i would hope, but it still appears that it can only be interpreted as mentioned above.

i don't know if anyone would know w/ certainty why there is an apparent discrepency between the regs and what is indicated in 99-23.

gary

[Mike Preston]

I just don't see any discepancy whatsoever. 99-23 (and subsequent guidance) extended the RAP. Period. Nothing more. The reg is clear that an amendment made at any time through 12/31/99 is afforded complete 411d6 protection with respect to the replacement of the PBGC rate with the GATT rate. It didn't say the end of the RAP. So there is nothing to update in the reg to make it consistent with 99-23. If the amendment wasn't made by 12/31/99 the reg provides alternative 411d6 protection, which is not as complete but certainly not insignificant.

The fact that the reg provided guidance with respect to amendments adopted after 12/31/99 tells me that the IRS knew that the RAP wouldn't necessarily end on 12/31/99 when they first published the reg. (4/5/95 in proposed form and 4/7/98 in final form).

In the Treasury Decision that published the final regs the IRS states:

"Several commentators requested that the regulations be amended to provide unconditional section 411(d)(6) relief for plan amendments adopting the applicable interest rate and applicable mortality table rules of RPA '94 regardless of changes in the time for determining the applicable interest rate. The IRS and Treasury have determined that providing some additional flexibility to employers in determining how to transition between the PBGC interest rate and the applicable interest rate and applicable mortality table, as discussed above, where the transition is combined with a change in the time for determining the interest rate, strikes an appropriate balance between the practical concerns of employers and the rights of participants. "

[Gary]

mike, tell us what you mean by "alternative 411d6 relief".

and from reading 99-23 it seems cleat that once the emendment is adopted, you no longer must retain the pbgc basis.

[Mike Preston]

See my message in the link that I cited earlier in this thread.

99-23 and the regs only allow you to eliminate the PBGC rates under certain conditions. IN other conditions you must retain the old basis against the new basis for a 12 month period.

[Gary]

it seems to me that the ONLY time there is an issue of maintaining anyhting for 12 months is if the time for determining the interest rate is changed. i.e. 1.417(e)-1(d)(10)(ii) of the reg. this seems to have nothing to do with if the amendment is adopted after 12/31/99.

so if the plan adopts gatt say 7/1/2002, then either the pbgc basis is no longer applicable at that time or it is maintained for 12 months. however, i see no explicit indication that it would have to be maintained for 12 months.

************

another perspective was brought to my attention.

the assertion was that a plan can operate as if the GUST amendment has been adopted prior to the time the amendment is adopted (if the amendment is made prior to the end of the remedial amendment period) and it would not violate 411d6. this seems to imply that the plan can replace pbgc w/ gatt before adopting the actual amendment. i must be missing something and i am going off on a tangent i don't want to be.

curious to hear any comments on this.