When calculating the most valuable benefit (MVAR) for a plan with no s

[AndyH]

When calculating the most valuable benefit (MVAR) for a plan with no subsidies but with a lump sum ( using GATT rate first day of plan year) available at termination of employment, wouldn't the lump sum be the most valuable benefit, with the low current GATT rates resulting in an inflated MVAR?

Or, does the lump sum get ignored? There seem to be different interpretations of whether a lump sum which is "subsidized" only by low discount rates is considered or ignored.

If the lump sum is considered, is it proper to assume no change in the GATT rate?

Opinions or interpretations?

[AndyH]

Well, now I have two answers, one yes and one no, both from highly respected sources. One says the lump sum using GATT is used for the MVAR.

The other says the lump sum becomes the most valuable accrual only if the plan specifies a fixed rate below 7.50% for lump sum purposes (presumably with GATT being a minimum), but that the fixed rate and associated mortality would be used, not the GATT amount. But, this same person says this is an area of controversy, so ...... (maybe this explains the lack of comment here).

Other opinions would be appreciated.

[Guest]

The regulations require the QJSA to be at least as valuable as any other optional form of benefit, including a lump sum. Depending on the plan's interest and mortality assumptions for optional forms and the GATT assumptions for lump sums, it is possible that the lump sum is the most valuable optional form. However, note that the 401(a)(4) regulations require you to test your most valuable accruals using the QJSA. Thus, the "subsidized" lump sum should be ignored for this purpose.

[AndyH]

Thank you for the response, Harry O.

Your answer is consistent with what I have read and been told by other sources provided that by "subsidized", you mean market related, e.g. GATT rates, but not "plan" rates.

For example, if a plan with act equiv of 7.50% and UP84 for monthly conversions , and with no other subsidies offered immediate lump sums using the greater of 6.00% and UP84 ("plan rates") or GATT 5.83% with 83GAM blended ("subsidized rates") and the QJSA at NRA would be $1,000 on an annuity basis, would you agree that the MVAR would be the "plan rate (6%)" lump sum converted back to a QJSA at testing age, producing a QJSA for testing purposes in excess of $1,000?

If I follow you correctly, this might not be true if the plan rate lump sum was based upon 7.50% or higher.

The example above is a textbook example that started this inquiry.

[Guest]

I would simply use the $1,000 benefit. The lump sum is "subsidized" only because the plan is forced to use legally mandated assumptions for this benefit. I believe the IRS has informally indicated that it will look the other way on this issue.

[AndyH]

Harry O:

I appreciate and respect your interpretation, which makes perfect sense to me. I have no doubt that others agree.

Your interpretation is, however, directly contrary to that of at least three actuaries, two of whom have expressed their contrary interpretation (albeit somewhat incompletely, resulting in my questions) in ASPA textbooks (C-4 Exam "Current Topics for the Retirement Plan Consultant").

Your interpretation appears to be widely used, however. It is amazing to me that such an old question is so differently interpreted, because the results would be significantly different.

Thanks again for the help.

[AndyH]

Any further comments on the treatment of a lump sum provision in general testing would be most welcome. I've received a different answer from virtually everyone I've asked.

Even an "I'm not sure" or "the regs are unclear" from those experienced in DB general testing would be helpful. What do others do? This is not a hypothetical question.

[Guest]

I have always ignored the subsidized lump sum. I think it's the only logical solution. If you don't, than external factors (fluxuating GATT Rates) will have a dramatic impact on your discrimination testing. As the rates change it will cause large swings in the amount of your annual accrual. To me, fluxuating interest rates shouldn't dictate whether or not your plan is discriminatory by design.

This is just my opinion.

If the ASPA exam writers hold a different opinion than the general understanding of the practing consultants, maybe you should contact them to find out the basis of their opinion.

[AndyH]

Thank you for your response, Keith. I tried as you suggested before, but the response was somewhat vague.

Reading it again, it was not necessarily inconsistent with your approach, that the lump sum need be considered to the extent that it was based upon a discount rate of less than 7.50%. The response further stated that the applicability of GATT rates was "controversial", but that in the author's opinion GATT rates would not be used unless GATT was the actuarial equivalent basis, which I take to mean used for monthly conversions as well as lump sums.

The textbook item which caught my attention was a plan with a lump sum provision based upon 6% and 83 GAM blended. It was not specified whether this was a fixed equivalency or the applicable GATT rate. This was and is unclear, leading to my questions.

Anyway, thanks again. The feedback is very helpful.