Do 417(e)(3) rates apply to a lump sum pre-retirement death benefit?

[Belgarath]

Actuary is saying they don't, and while I make it a point not to argue with EA's 'cause I don't know much about DB plans, I just wondered if y'all agree?

[My 2 cents]

All of the following presumes that the defined benefit plan is not a non-electing church plan or a governmental plan, and so subject to ERISA:

If the lump sum pre-retirement death benefit is defined as the value of a series of monthly payments, I cannot imagine that 417(e)(3) would not apply. If it is something else (say a return of contributions with interest or payment of the account balance under a cash balance plan) it might not. For example, if the lump sum pre-retirement death benefit is the present value of what would have been payable to a hypothetical joint/contingent annuitant the same age as the participant had the participant elected a joint and survivor or contingent annuitant form with the hypothetical as joint/contingent annuitant and then died immediately after payments started, how could it not be subject to 417(e)(3)?

[Hojo]

Agreed, I see no way 417(e) doesn't apply.

[Belgarath]

Thanks. Non-governmental plan, subject to ERISA. I just don't understand how 417(e) doesn't apply (unless the plan assumptions produce higher benefit, which might perhaps be what the EA meant?)

Death benefit is defined as:

(a) Death prior to retirement benefits beginning. If a Participant dies prior to the Participant's Retirement Date, such Participant's Beneficiary shall receive a death benefit equal to the Actuarial Equivalent of the Accrued Benefit.

Actuarial equivalent is defined as:

1.3 "Actuarial Equivalent" means a form of benefit differing in time, period, or manner of payment from a specific benefit provided under the Plan but having the same value when computed using Pre Retirement Table: 1971 GAM; Post Retirement Table: 1971 GAM, Pre Retirement Interest: 7%; and Post Retirement Interest: 7%.

Notwithstanding the foregoing, the mortality table and the interest rate for the purposes of determining an Actuarial Equivalent amount (other than nondecreasing life annuities payable for a period not less than the life of a Participant or, in the case of a Pre Retirement Survivor Annuity, the life of the surviving spouse) shall be the mortality table and the interest rates specified above or the "Applicable Mortality Table" and the "Applicable Interest Rate" described below, whichever produces the greater benefit:

(a) The "Applicable Mortality Table" means the mortality table prescribed by Code Section 417(e)(3). For any distribution with an Annuity Starting Date on or after the effective date of these Subsections and before the adoption date of these Subsections, if application of the amendment as of the Annuity Starting Date would have caused a reduction in the amount of any distribution, such reduction is not reflected in any payments made before the adoption date of these Subsections. However, the amount of any such reduction that is required under Code Section 415(b)(2)(B) must be reflected actuarially over any remaining payments to the Participant.

(b) The "Applicable Interest Rate" means the annual rate of interest on 30 year Treasury securities determined as of the first calendar month preceding the first day of the Plan Year during which the Annuity Starting Date occurs. However, except as provided in Regulations, if a Plan amendment (including this amendment and restatement) changes the time for determining the "Applicable Interest Rate" (including an indirect change as a result of a change in the Plan Year), any distribution for which the Annuity Starting Date occurs in the one year period commencing at the time the Plan amendment is effective (if the amendment is effective on or after the adoption date) must use the interest rate as provided under the terms of the Plan after the effective date of the amendment, determined at either the date for determining the interest rate before the amendment or the date for determining the interest rate after the amendment, whichever results in the larger distribution. If the Plan amendment is adopted retroactively (that is, the amendment is effective prior to the adoption date), the Plan must use the interest rate determination date resulting in the larger distribution for the period beginning with the effective date and ending one year after the adoption date.

In the event this Section is amended, the Actuarial Equivalent of a Participant's Accrued Benefit on or after the date of change shall be determined (unless otherwise permitted by law or Regulation) as the greater of (1) the Actuarial Equivalent of the Accrued Benefit as of the date of change computed on the old basis, or (2) the Actuarial Equivalent of the total Accrued Benefit computed on the new basis.

A Participant's Accrued Benefit shall not be considered to be reduced in violation of Code Section 411(d)(6) because the Participant's Accrued Benefit is determined using the "applicable mortality table" and the "applicable interest rate."

[tymesup]

417(e) applies to a QJSA or a QPSA. If the plan provided a death benefit in excess of that, such as the PV of the accrued benefit, 417(e) would not have to apply to the entire benefit. It would be unusual to do that, however, since it makes administration that much more complicated.

Your plan doc says it does apply.

[My 2 cents]

Saying that the death benefit is to be the actuarial equivalent of the Accrued Benefit is not the same as saying that it is to be paid as a lump sum. If the pre-retirement death benefit is to be paid as a straight life annuity to the beneficiary (for the beneficiary's life), then 417(e) would not apply. The equivalence calculation would be based on the 1971 GAM at 7%.

Shouldn't the pre-retirement death benefit refer to the spouse or QPSA? Perhaps that part was just not quoted.

[Belgarath]

Sorry - I didn't post that section because the benefit is supposedly being paid in a lump sum. But here it is:

5.8 DISTRIBUTION OF BENEFITS UPON DEATH

(a) Qualified Pre Retirement Survivor Annuity (QPSA). Unless otherwise elected as provided below, a Vested Participant who dies before the Annuity Starting Date and who has a surviving spouse shall have the death benefit paid to the surviving spouse in the form of a Pre Retirement Survivor Annuity. The Participant's spouse may direct that payment of the Pre Retirement Survivor Annuity commence within a reasonable period after the Participant's death (but not later than the month in which the Participant would have attained the Earliest Retirement Age under the Plan if the Participant dies on or before the Earliest Retirement Age). If the spouse does not so direct, payment of such benefit will commence at the time the Participant would have attained the later of Normal Retirement Age or age 62. However, the spouse may elect a later commencement date, subject to the rules specified in Section 5.9.

(b) Election to waive QPSA. Any election to waive the Pre Retirement Survivor Annuity before the Participant's death must be made by the Participant in writing (or in such other form as permitted by the Internal Revenue Service) during the election period and shall require the spouse's irrevocable consent in the same manner provided for in Section 5.7(a)(2). Further, the spouse's consent must acknowledge the specific nonspouse Beneficiary. Notwithstanding the foregoing, the nonspouse Beneficiary need not be acknowledged, provided the consent of the spouse acknowledges that the spouse has the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elects to relinquish such right.

© Time to waive QPSA. The election period to waive the Pre Retirement Survivor Annuity shall begin on the first day of the Plan Year in which the Participant attains age thirty five (35) and end on the date of the Participant's death. An earlier waiver (with spousal consent) may be made provided a written (or in such other form as permitted by the Internal Revenue Service) explanation of the Pre Retirement Survivor Annuity is given to the Participant and such waiver becomes invalid at the beginning of the Plan Year in which the Participant turns age thirty five (35). In the event a Vested Participant separates from service prior to the beginning of the election period, the election period shall begin on the date of such separation from service.

(d) QPSA notice. With regard to the election, the Administrator shall provide each Participant within the applicable period, with respect to such Participant (and consistent with Regulations), a written (or in such other form as permitted by the Internal Revenue Service) explanation of the Pre Retirement Survivor Annuity containing comparable information to that required pursuant to Section 5.7(a)(5). For the purposes of this paragraph, the term "applicable period" means, with respect to a Participant, whichever of the following periods ends last:

(1) The period beginning with the first day of the Plan Year in which the Participant attains age thirty two (32) and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age thirty five (35);

(2) A reasonable period after the individual becomes a Participant;

(3) A reasonable period ending after the Plan no longer fully subsidizes the cost of the Pre Retirement Survivor Annuity with respect to the Participant;

(4) A reasonable period ending after Code Section 401(a)(11) applies to the Participant; or

(5) A reasonable period after separation from service in the case of a Participant who separates before attaining age thirty five (35). For this purpose, the Administrator must provide the explanation beginning one (1) year before the separation from service and ending one (1) year after such separation. If such a Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined.

For purposes of applying this Section 5.8(d), a reasonable period ending after the enumerated events described in paragraphs (2), (3) and (4) is the end of the two (2) year period beginning one (1) year prior to the date the applicable event occurs, and ending one (1) year after that date.

(e) Consent. If the present value of the Pre Retirement Survivor Annuity derived from Employer and Employee contributions does not exceed $5,000 at the time of distribution, then the Administrator shall direct the immediate distribution of the present value of the Pre Retirement Survivor Annuity to the Participant's spouse. No distribution may be made under the preceding sentence after the Annuity Starting Date unless the spouse consents in writing (or in such other form as permitted by the Internal Revenue Service) to such distribution. If the value exceeds $5,000, then an immediate distribution of the entire amount of the Pre Retirement Survivor Annuity may be made to the surviving spouse, provided such surviving spouse consents in writing (or in such other form as permitted by the Internal Revenue Service) to such distribution. Any consent required under this paragraph must be obtained not more than one hundred eighty (180) days (ninety (90) days for Plan Years beginning before January 1, 2007) before commencement of the distribution and shall be made in a manner consistent with Section 5.7(a)(2).

The present value in this regard shall be determined as provided in Section 1.41.

(f) Alternative form of distribution. If the present value of the total death benefit does not exceed $5,000 at the time of distribution, then the Administrator shall direct the immediate distribution of the present value of the death benefit. Otherwise, to the extent the death benefit is not paid in the form of a Pre Retirement Survivor Annuity, it shall be paid to the Participant's Beneficiary in one lump sum in cash.

(g) All annuity Contracts (if any) that are purchased under this Plan shall be non transferable when distributed. Furthermore, the terms of any annuity Contract purchased and distributed to a spouse shall comply with all of the requirements of the Plan.

[david rigby]

Just so we understand all sides of this issue, I wonder if you can obtain, and post, the reasoning alluded to in the original post.

[Belgarath]

I asked for it, but I'm not sure it will be forthcoming. In the meantime, what I've been able to deduce, based upon my limited knowledge, as well as the comments I've seen thus far, lead me to believe that 417(e) rates must be considered.

And while I have no idea what 417 rates are currently, it seems likely that they are lower than plan assumptions, and would therefore produce a higher lump sum value, which would need to be the one used?