Pension Protection Act Blog

For plan years beginning on or after January 1, 2008, the Pension Protection Act amended Code section 417(e)(3), changing the applicable interest rate and applicable mortality table. For single employer defined benefit plans terminating before January 1, 2008, this change created a potential lump sum valuation issue because a plan could be terminated before January 1, 2008, but not distribute until after January 1, 2008, meaning the plan could terminate under the old definition of actuarial equivalence, and distribute under the new definition of actuarial equivalence.

The PBGC has clarified this situation with Technical Update 07-3, which provides Minimum Lum Sum Assumptions for Terminating Single-Employer Plans. It specifically addresses which definition of applicable interest rate and applicable mortality table applies if the plan’s termination date occurs in a plan year beginning before January 1, 2008, and the final distribution date is on or after January 1, 2008.

The PBGC reasons that since the change to Code section 417(e)(3) made by PPA is effective only for plan years beginning on and after 2008, plan provisions incorporating those changes cannot take effect for purposes of ERISA Code section 4041 before the first plan year beginning on or after January 1, 2008. Therefore, the changes made by PPA in calculating the applicable interest rate and applicable mortality table cannot take effect for a plan terminating before January 1, 2008, even if the distribution date is after January 1, 2008.

The PBGC provides this example:

For example, assume a calendar year plan which has a termination date of July 1, 2007. On June 30, 2007, the plan’s definition of applicable interest rate and applicable mortality table is amended for the PPA changes to Code section 417(e)(3), effective January 1, 2008. Also assume that the plan has a one-month lookback and a one-month stability period. Because the plan terminated before PPA 2006 takes effect on January 1, 2008, pre-PPA 2006 law applies for defining the applicable interest rate and applicable mortality table. If the plan makes its final distribution of assets in February of 2008, the applicable interest rate would be the 30-year Treasury rate for January 2008 (the month before the distribution date) and the applicable mortality table would be that in effect of July 1, 2007 (i.e. the table provided in IRS Rev. Rul. 2001-62). The same would be true if the plan had not been amended but provided that section 417(e)(3) was incorporated by reference, without a specific description of the applicable actuarial assumptions.

The PBGC specifically did not address which assumptions would apply if the plan terminated during the one year after the effective date of the PPA 2006 lump sum assumptions and makes distributions in a subsequent year. The PBGC states that they will be issuing future guidance on these issues due to the phase-in of the applicable interest rate.

Quick Review: What was PPA’s change to the applicable interest rate and applicable mortality table?

For plan years beginning after the effective date of the Retirement Protection Act of 1994 and before January 1, 2008, the applicable interest rate is the annual interest rate on 30-year Treasury securities applied during a specific lookback month and a stability period. For example, a plan with a calendar year stability period and a one-month lookback would use the 30-year Treasury rate for December 2006 to determine minimum lump sums with distribution dates in 2007. The applicable mortality table is prescribed by the Secretary of the Treasury.

For plan years beginning on or after January 1, 2008, PPA amended Code section 417(e)(3) to change the applicable interest rate and applicable mortality table. After January 1, 2008, the applicable interest rate is now three segment rates derived from a corporate bond yield curve, similar to rates used to determine minimum funding requirements under PPA 2006. For plan years beginning in 2008 through 2011, the segment rates are blended with 30-year Treasury yields to develop Transitional Segments Rates which are published monthly by the IRS. The applicable mortality table for 2008 is set forth in Rev. Rul. 2007-67.

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