Benefit Form for Funding

[Dinosaur]

I couple of years ago we took over a plan that had the plan funding to an annuity. The plan now pays lump sums so we want to change it to fund to a lump sum.

I'm assuming this change would be a change in the actuarial cost method and not a change in actuarial assumptions, correct? Also, does this change require IRS approval? If so, could someone point me in the right direction. I can't get me hands on where this was discussed.

Thanks

[Andy the Actuary]

(1) How is the treatment described in the actuarial report?

(2) Sounds as if there may have been a plan amendment to allow for lump sums?

(3) On surface, feels like an assumption change. I.e., the assumption was 100% elect annuities; the assumption is changed to 100% elect lump sums.

Look at item 24 SB instructions. Note the comment about decreasing the short-fall. This would seem to mean if there is no short-fall before, then IRS approval would not be required.

[Dinosaur]

Thanks Andy

1)The prior valuation report just said "Benefit Funded to Annuity".

2)Yes, there was an amendment allowing lump sum benefts for all participants.

3) it makes sense that going from probablity of 100% annuities to 100% lump sums should be an assumption change.

Thanks for the SB item since this change obviously increases the funding shortfall.

[Andy the Actuary]

Conjecture is when all is said and done you might regret ever having posted this question.

[My 2 cents]

I couple of years ago we took over a plan that had the plan funding to an annuity. The plan now pays lump sums so we want to change it to fund to a lump sum.

I'm assuming this change would be a change in the actuarial cost method and not a change in actuarial assumptions, correct? Also, does this change require IRS approval? If so, could someone point me in the right direction. I can't get me hands on where this was discussed.

Thanks

1. Changing from basing the funding on distribution under the normal form (say straight life annuity) to basing the funding on anticipated distribution as a lump sum is never, in my opinion, a change in method. Absolutely, 100% of the time, it is a change in actuarial assumptions.

2. The plan having been amended (presumably) to permit distribution as a lump sum (which will only happen with the approval of the participant and, if the participant is married, the spouse), the law requires that the funding be based on the enrolled actuary's best estimate as to the percentage of benefits to be paid as lump sums. If an assumption of 100% utilization works for you, that's what you use.

3. Adding a lump sum option does not have a material impact on the funding target, unless the plan calculates lump sums using the greater of a fixed (low) discount rate or the 417(e) rates. If the plan specifies that the lump sums are to be based solely on 417(e) rates (it does specify that, right?), assuming that benefits will be paid as lump sums has virtually no impact on the funding target as a result of the substitution rule (the requirement that the expected lump sums used for the funding target are to be determined using the funding discount rates - yes, those under HATFA - irrespective of how much more will be payable to anyone who actually takes a lump sum payment). Given the substitution rule, the only real difference between assuming an annuity and assuming a lump sum is that the former is based on sex-distinct mortality and the latter is based on blended unisex mortality.

4. As for needing IRS approval for a change in assumptions that reduces the funding shortfall by $50 million (that's the benchmark for needing IRS approval, right?), don't give it a thought unless the plan is huge and covers a population that is almost all female or if the change in assumptions includes other changes that will materially reduce the funding target. And, yes, if there was no shortfall before the change, making the funding target lower will not reduce the shortfall.

[Dinosaur]

Thanks for the information My 2 cents