“Mid-Term” Index

L1: “Mid-Term” IndexI am looking for information in regard to the Mid-Term AFR that is to be used with 72[t] distributions. What does this index consist of? Is it the five-year treasury securities? I had been planning for more than fifteen years to use the 72[t] exception. I was not aware of the changes until recently.
This 4.12% rate is terrible. I don”t understand how the IRS allows major corporations to determine the funding of their defined benefit plans using 8-9% or more when we can only use 4.12% as a basis for 72[t].
Thanks for any input.
2003-03-21 19:32, By: Greg, IP: [127.0.0.1]

L2: “Mid-Term” IndexHello Greg:
Since 1985, the IRS has been required to compute AFRs pursuant to IRC 1274(d) on a monthly basis. The definition of the mid-term rate is “based on the average market yield…on outstanding marketable obligations of the United States with remaining maturity of 3 to 9 years”.
We all are forced to use a maximum of 120% of MT/AFR becuase the IRS says so & they are empowered to make that determination.
Conversely, defined benefit plans, to which you referred, are based on a whole series of actuarial assumptions, one of which is interest rate based usually a 40 year to indefinite term as well as previous actual plan experience.
TheBadger
wjstecker@wispertel.net

2003-03-22 08:18, By: TheBadger, IP: [127.0.0.1]

L2: “Mid-Term” IndexEchoing what the badger said, Defined Benefit plans use a variety of assumptions. And over time, the objective is to meet the funding assumptions like interest, mortality, morbidity, turnover, etc. Not meeting the assumptions brings other problems – just look at some of the Defined Benefit plans that have recentlybeen in the news – employer is having to come up with billions to keep the plan funded.
Some defined benefit plans – example 412(i) plans (where interest is one of the only assumptions)use interest rates much closer to the current 120% mid-term rate.
And would you believe – the usable 72(t)rate for the next 2 months will even be lower.2003-03-22 15:44, By: Gfw, IP: [127.0.0.1]