Question on Pension Equity Plans (PEP):

I have a PEP that generates a lump sum through a FAP formula, then converts the lump sum to an annuity based on a 4.00% Interest Rate and the UP 1984 Mortality Table. I currently have a participant age 60 whose lump sum under the plan is equal to $13,600, and whose annuity based on the assumptions above converts to $130/mo., payable at NRD (age 65). Do I need to then calculate a revised lump sum based on the $130 annuity amount, but multiplied by the applicable segment rates (e.g. the December 2007 segment rates and the RP-2000 Combined Table for 2008 lump sums)?

Doing this generates a lump sum of $13,800, so I am thinking the plan may be required to kick in an extra $200 for this participant's lump sum.

Is the PEP sponsored by a government or governmental agency?

No it is not.

Yes, you are on the right track. I assume you are using some sort of age adjustments/rounding in your descriptions, because I can't match your numbers very closely. But, as to the general statement that you have a db plan (which just happens to be a PEP) with an accrued benefit of $130 payable as a lump sum which evaluates to $X under the plan's definition of actuarial equivalence and $X+ under the required 417(e) definition, and therefore you must pay $X+, I concur.

Were you thinking that because this is a PEP that there was a way around the normal rules of 417(e)?

The normal form of annuity payment is 10CC, plus the participant is actually age 59 and 6 mos., so there are additional adjustments and rounding going on for me to get from the $13,600 LS to the $130 annuity, which is probably why you are not hitting out to those exact numbers.

I know there has been a lot of proposed regs recently dealing with Cash Balance plans and whipsaw, and what interest rates will allow a plan to avoid any adjusted lump sum calculations, etc. But as far as I can see there hasn't been too much out there specifically dealing with PEP's.

I think the main issue with my particular plan is the Mortality Table being used in the conversion. If we were to use a more current table I don't think there would be an issue. For example, when I used the 2008 Lump Sum table with a 4% interest rate, the lump sum converted to a L.A. of $115 per month. When I then recalculate the lump sum using the segment rates based on this annuity, the new lump sum is below the plan amount of $13,600.

Based on above, one solution could be for the plan to amend to a more current table. But of course that brings up another potential issue: 204(h) notices being required. In my example above, if the plan were amended to use the 2008 LS table, the participant's annuity would decrease from $130 to $115, however the lump sum under the plan would remain unchanged at $13,600. Would 204(h) be required in this case? Since the normal form of benefit under the plan is a lump sum, and that amount is not affected by this amendment, would a 204(h) notice be required? Or is the decreased annuity at NRD the deciding factor?

The decreased annuity is the deciding factor.

Figured as much.

Thanks. I appreciate your help with this.

PPA specifically exempts PEP plans from whipsaw...doesn't it

“defined benefit plan under which the accrued benefit (or any portion thereof) is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation.”


I believe the bold portion of the above is meant to specifically cover peps

Don't you have to be an applicable defined benefit plan for that? Is there any evidence that the OP's plan is one of those?