Involuntary Distribution Provision: GATT Requirements

[Guest BJGrenier]

If you have a DB Plan which only allows lump sum distributions of $5,000 or less (involuntary distributions) and your Plan has not been amended for GATT yet, it is my understanding that you do not have the requirement of doing the "greater of" calculation because involuntary cash-outs are not protected by 411(d)(6). See Reg. 1.417(e)-1(d)(10). What do others think about this?

[Guest]

I agree with this but only if you are replacing a PBGC-based rate. It makes sense -- you could amend the plan on Friday to eliminate the involuntary cashout feature and you could amend the plan on Monday morning to add it back in with GATT factors.

Issues arise if your current involuntary lump sum is determined using the lower of two interest rates and one is not PBGC-based. For example, the plan might provide involuntary cashouts using the lower of (1) the applicable PBGC rate, or (2) 5%. The IRS position seems to be that you need to grandfather the 5% rate.

[David]

What if the lump sum dist. was greater than $5,000 from a plan not yet amended for GATT? Would the LS dist. be the greatest of GATT, PBGC or Act Eq.? (Apologies for the slight diversion.)

[AndyH]

I suspect there's some mis-communication here.

We aren't saying that a plan which currently says lump sums are based upon PBGC rates can pay somebody out on GATT rates (ignoring the existing PBGC language) without the plan being amended, are we?

To answer David's question, I don't think it makes any difference if the amount is under or over $5,000. Before amending, you have to use the greater of the current provisions or GATT. It can be amended to use GATT only, but as Harry points out, this amendment cannot eliminate an existing fixed rate.

[David]

After amendment for GATT (after the first day of the 2000 py) I beleive there is a one yr wearaway on the PBGC rates.

[AndyH]

No, that is not correct.

There is a one year grandfather of the timing of determining the applicable rate, for example if you change from first of the month to first of the year, then you have a greater of calculation for one year, but both on GATT basis.

But, if there was a fixed rate for comparison, that can not be eliminated with respect to any accrued benefit.

[david rigby]

I believe Andy is correct. As he points out in his first post, after 1/1/2000 and until the GATT amendment is actually adopted, the minimum lump sum requirement is the greater of the GATT basis or the PBGC basis.

[David]

First of all, thanks for your help. I may have been mistakenly thinking of the timing for determining the rate. I remember reading about that. I've been working with plans that either amended for GATT before 12/31/99, in which case, for 2000+, you could ignore the PBGC rates, or haven't amended at all for GATT, in which case both the PBGC rates and GATT have to be considered. Now, I'm still confused about a current amendment for GATT though. What if you did an amendment during 2000, effective 1/1/01 adopting GATT? Is there any grandfathering of the PBGC LS or PBGC rates? If not, how is that different than the 12/31/99 exemption?

[Guest BJGrenier]

Thanks for the input. Are we saying that if the amendment is done after 12/31/99, and your plan has been using PBGC rates, you have to use the greater of PBGC or GATT up until the effective date of the amendment changing to GATT, except with respect to plans that only allow the lump sum option with respect to involuntary distributions ($5,000 cashout)and these do not have to use the greater of calculation? Also, when you change to GATT for purposes of determining a lump sum actuarial equivalence, what does one do with the top heavy present value determination? These rates are usually stated in the Plan. I read the regulations on this and the IRS's only requirement is that these rates be reasonable. Is there a problem with using different rates here?

[AndyH]

David, no. There is no required grandfathering if you are switching from PBGC to GATT. Period.

BJ, your first sentence is correct except when you get to except. There is no except. There is no significance to under or over any number, voluntary, or involuntary. The rules are the same. Stop before the except and it's correct.

Also, you can continue to use anything reasonable for top heavy purposes. These rules have not changed in quite some time. It has no relationship to 417(e).

[Guest janie]

Just so I understand, going back to Harry O's response, are you saying that you could only amend the plan to eliminate the involuntary cashout provision if it used the PBGC-based rate exclusively, and that you could not eliminate the cashout provision if it provided, for example, that the lump sum amount would be determined using the greater of the PBGC rate or plan rate. In other words, the latter provision would be protected under 411(d)(6) even though 1.411(d)-4 Q+A 2(B)(2)(v) appears to state that an employer can amend a plan "to eliminate the involuntary single sum option for employees with benefits between $3,500 and such lower amount without violating " 411(d)(6)?