QJSA - Most Valuable

[ERISA25]

I'm not an actuary, but trying to get a better understanding of the "most valuable" requirement, as set out in Treas. Reg. Section 1.401(a)-20, Q&A - 16. If a plan uses an interest rate that is more favorable than those prescribed in IRC 417(e)(3) for determining LS and let's say 6.5% for converting among annuity options, would there be a concern that the LS option is more valuable than the QJSA, which is the normal form for married participants? How is the most valuable determination made? Is it simply a matter of using the more favorable factors to determine the present value of the QJSA?

[Effen]

ok, I will jump in even though I haven't looked any of this up.

In IRS Announcement 2004-58, I.R.B. 2004-29 the IRS gave an automatic pass on the QJSA being most valuable against the lump sum if the lump sum is based on 417(e) rates. If you are not using 417(e) rates, you may have a problem if the lump sum turns out to be more valuable than the QJSA.

Under the relative value rules you would compare the value of the lump sum to the value of the immediate QJSA based on 417(e) rates, therefore early retirement reductions can also impact the results.

Lets say the AB is 1,000 for life. The partic is 65 and spouse 62. Plan using 6.5% for optional forms and 417e for lump sums.

LO = 1000, J&100 = 850, LS = 162,000, value of J&100 on 417(e) - 166,000

LS is 97.6% of QJSA. No problem - QJSA is more valuable.

Now, lets say you are using 2% to determine the value of the lump sum.

LO = 1000, J&100 = 850, LS = 194,000, value of J&100 on 417(e) - 166,000

LS is 117% of QJSA. Now I think you might have a problem.

[Mike Preston]

While your description of the IRS citation is correct, the numerical representation includes comparisons that needn't be made. If I get time later today I'll post an example. In the meantime just leave it with: ignore 417(e) lump sum (whether it is higher or lower) when testing the fact that QJSA must be most valuable.

[Hojo]

I think the problem from the original post is contained in this quote, "If a plan uses an interest rate that is more favorable than those prescribed in IRC 417(e) for determining LS".

If you are not using 417(e) you have to do the most valuable testing.