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AFTAP Calculation Questions


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14 replies to this topic

#1 tuni88

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Posted 30 March 2008 - 01:21 PM

We have a calendar year plan and our actuary certified last week that our 2007 AFTAP is 70% after having to forfeit a portion of our funding standard credit balance. It would have beeen 67.2% without using some of the credit balance. He used values from the 1/1/07 actuarial valuation report to make this calculation and says he won't be able to calculate the 2008 AFTAP until this summer.

I'm thinking I may be able to make a rough estimate of the 2008 AFTAP myself because included in the materials that came with the 2007 actuarial report was a benefit payout projection for the next 75 years and I know what is the value of assets as of 1/1/08. I think I should really be working with an updated benefit payout projection, but is the following a valid approach?:

1. Select the 3 segment rates. [Can someone tell me what are the 3 rates?]

2. Discount to 1/1/08 the expected payouts in year 1 thru 5 (2008 thru 2012) using the rate for segment 1.

3. Discount the expected payouts in year 6 thru 20 (2013 thru 2027) back to year 5 using the segment 2 rate and then discount that result for 5 years using the segment 1 rate. [Or do I use the segment 2 rate for all 20 years?]

4. Similar approach for years 2028 to the end of 74 years.

5. We didn't use all of the credit balance so can I use what's left for the 2008 calculation if neeed?

Is this approach too 'simple' to be valid as a rough estimate?

#2 Andy the Actuary

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Posted 30 March 2008 - 02:07 PM

The recommendation is not to be your own actuary just as you don't want to be your own doctor, attorney, or cpa. But, here are some suggestions:

Was the Plan's current liability as of 1/1/2007 determined using the highest allowable interest rate of 5.78%. If not, the actuary should look at a recalculation. Also, was market value of assets used or was a smoothing method use. The 2007 certification uses actuarial value, so it is possible the asset valuation method could be changed as of 1/1/2007 (and the valuation revised) to one more favorable. Are other actuarial assumptions reasonable?

Assuming the 2007 work is in order, take a look at the 12/31/2007 assets. What was their increase? If you increase the 2007 current liability by say 5.50% and remove benefit distributions and compare the result to the assets (without regard to the credit balance), will you come close to 80% in 2008?

Presumably, your plan offers lump sum payment. In such case, has the actuary at least given you notice or direction to prepare a notice so you can provide to affected participants and beneficiaries, which is believed to include pensioners and terminated vested participants? This notice would need to be give by April 30.

As I once told a prospective client who asked what would happen if I got run over by a steamroller (I am a one-person show), "I had this barber I used for years. He finally died." The prospect asked, "What did I do." I replied, "I went bald." It is not necessary for you to go bald!
The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

#3 Effen

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Posted 30 March 2008 - 08:06 PM

Tuni, are you an actuary? If not, even if you could determine the amount correctly, you still couldn't certify to it.

I'm also a bit confused by what you said your actuary did. 1st, I don't think you can waive 2007 credit balance. I thought that for 2007 certifications if the plan was > 90% funded including the credit balance in the assets, than you can use it in the assets, but if the funded ratio was less than 90%, you need to subtract the credit from your assets. The "burning" concept is for 2008 AFTAPs, not 2007. (At least that is what I thought).

2nd, even if you could burn 2007 credit balance, you only burn it if it gets you over one of the thresholds (60% or 80%). Since going from 67% to 70% doesn't allow you to cross a threshold, I didn't think you could do it...unless he is thinking that burning credit to gets you to 70% in 2007, will produce 60% in 2008, but I didn't think that was the way it worked.

I think you are 67% in 2007, and presumed to be 57% in 2008 and therefore your plan is hereby frozen until the actual 2008 AFTAP can be certified. If you are confident that you will be over 60% in 2008, maybe you can get the actuary to do a range certification to avoid the restrictions. If you assure him that you will make the necessary 2007 contribution to guarantee the plan will be at 60% (or 80%) he might go along with a range certification.
The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

#4 tuni88

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Posted 30 March 2008 - 09:41 PM

Andy/Effen,

I have my 'CA' - Curbstone Actuary - designation from a match-book university in Florida, class of '99.

I'm certain he used the highest allowable rate for the current liability and we've never used other than plain old market value for the assets. We had a +9% return during calendar 2007. I recollect that 8% was the assumption - or was it 7.5%? I presume the actuarial assumptions are reasonable. I'll make the 5.50% increase calculation thingee tomorrow at work, but suspect there won't be much improvement. BTW, so what if it does approach 80%? What are the implications?

What do you think of my back-of-the-napkin approach in the original post? And what are the 3 rates I should use? Approximations are OK, I think.

Andy, are Effen's comments/concerns valid? I'll have to go back and read our actuary's letter but I'm pretty sure he certified our 2007 AFTAP in the way I described. Since there is no 1/1/08 actuarial report how else could it be done? The only thing there is to work with is from 1/1/07. He wanted to get the 67.2% up to 70% for 2007 so that 2008 could be deemed to be 60% until the 2008 work was completed.

Yes we offer lump sums and he says he'll draft a notice once an IRS "soon-to-be-published" model notice is available. "Soon" better be pretty soon, no? (Why the heck would they not have something ready by now?)

This DB plan WILL make me lose my hair. It's likely on the way out for us. Too bad.

tuni88, CA #99-0001

#5 Andy the Actuary

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Posted 30 March 2008 - 10:08 PM

I know of no exception to the 30-day notice of restricted benefits. Unlike some notifications, there is to my knowledge no forgiveness because a model notice hasn't been issued. Further, I don't recall where PPA instructed the IRS to issue a model notice.

Regarding burning 2007 credit balance to increase the 2007 AFTAP, I find in the proposed regulations,

"However, if the employer makes an election to reduce some or all of the funding standard carryover balance as of the first day of the first plan year beginning in 2008 in accordance with proposed § 1.430(f)–1(e), then the present value (determined as of the valuation date for the prior year using the valuation interest rate for that prior year) of the amount so reduced is not treated as part of the funding standard account credit balance when that balance is subtracted from the value of net plan assets. Thus, an employer’s election to reduce the funding standard carryover balance in 2008 will have the effect of reducing the amount that must be subtracted from the assets in determining the 2007 AFTAP for purposes of applying the presumptions under section 436(h)(3) as of the first day of the 4th month of the plan year beginning in 2008."

Mr/Ms 88, I did not comment on your methodology because I believe it is dangerous for you to support your proceeding in such fashion. There are actually 11 choices of interest rate to select and what you would use may not necessarily be what your actuary would recommend. That you were unaware of this evidences this point about being your own actuary. Effen's comment is well put: Even if you were able to determine the 2008 funded level accurately at 80+%, you couldn't certify it, and so the 60% funded presumption would apply anyway. The exercise only tells you what you already know -- you need someone to pick up the phone and talk to youl

Edited by Andy the Actuary, 31 March 2008 - 09:04 AM.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

#6 AndyH

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Posted 31 March 2008 - 08:27 AM

Tuni, it sound to me like you need a second opinion from another actuary. Plus, this "summer" stuff is absurd if the margin could be as little as 3%. But I said if. Only one way to know.

#7 Penman2006

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Posted 31 March 2008 - 09:39 AM

Regarding Andy the Actuary's post, Example 3 at the end of the 8/31/07 Section 436 regs illustrates that cite. It shows how to use the 1/1/08 COB in the development of the 2007 AFTAP certification. My questions regarding the 1/1/08 COB are:

Let's say that I have completed the 2007 actuarial valuation but I have not signed the 2007 Schedule B because the sponsor is waiting until 9/08 to make the 2007 plan year contribution (which, for what it's worth, will exceed the minimum required contribution).

1. Can I use the "anticipated" 1/1/08 COB in my 2007 AFTAP certification, in other words, the 1/1/08 COB which includes the anticipated/expected 2007 plan year contribution? (If so, I will get a written statement from the sponsor regarding their intentions.)

2. Example 3. discusses the sponsors "election" to use some of the 1/1/08 COB to get to the 60% threshold at 4/1/08. That would seem to be a "deemed election" but they don't use that terminology. Do I need to have the sponsor sign a written waiver to waive some of the 1/1/08 COB as in this example?

Edited by Penman2006, 31 March 2008 - 09:41 AM.


#8 Andy the Actuary

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Posted 31 March 2008 - 09:56 AM

Mr. P-Man (do you collect fountain pens?):

PPA has become synonymous with CYA.

I intend to have my clients submit a form that they are commiting to make this contribution by 9/15 as well as waiving FSCOBs and by so doing are avoiding benefits restrictions and otherwise distributing some heinous notice. They will also be certifying that they understand that if they fail to make such contributions, then they will be subject to horrendous penalties and will be incarcerated in pension prision. They will also agree to actuarial assumptions as well as the correct spelling of my name. In short, I am only acting on written request of my clients.

In short, you may wish to go through the proposed regulations and infer from whereever it states, "the plan sponsor may elect" that you should be getting a "cya" note from your client.

I am a 1950s guy and tend to operate on hand-shakes. The issue here is we have no experience in the positions the IRS/DOL will take with various elections, so prudence first. This is a sad position I believe I need to take.
The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

#9 Penman2006

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Posted 31 March 2008 - 10:45 AM

Andy the Actuary,

I hear you on the cya stuff. That's not the person I want to be, but more and more I feel forced in that direction. It's just a waste of everyone's time.

How do you feel about including the 2007 receivable contribution in the 1/1/08 COB for 2007 AFTAP purposes (prior to signing the 2007 Schedule B)? Is that what you are doing?

I would welcome input from anyone on this question.

Dave

Edited by Penman2006, 31 March 2008 - 10:51 AM.


#10 Andy the Actuary

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Posted 31 March 2008 - 11:04 AM

The 8/31/2007 proposed IRS reg. provided, ". . . for plan years beginning before January 1, 2009, the enrolled actuary’s certification of the adjusted funding target attainment percentage is permitted to take into account employer contributions for the prior plan year that are reasonably expected to be made for that prior plan year but have not been contributed by the date of the enrolled actuary’s certification."

This was a pleasant but surprisingly contradictory result since the instructions to Schedule B provide, "Show only contributions actually made to the plan by the date Schedule B is signed."

Seems to me we're certifying the same thing!!!!!
The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

#11 tuni88

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Posted 31 March 2008 - 12:58 PM

I know of no exception to the 30-day notice of restricted benefits. Unlike some notifications, there is to my knowledge no forgiveness because a model notice hasn't been issued. Further, I don't recall where PPA instructed the IRS to issue a model notice.

Regarding burning 2007 credit balance to increase the 2007 AFTAP, I find in the proposed regulations,

"However, if the employer makes an election to reduce some or all of the funding standard carryover balance as of the first day of the first plan year beginning in 2008 in accordance with proposed § 1.430(f)–1(e), then the present value (determined as of the valuation date for the prior year using the valuation interest rate for that prior year) of the amount so reduced is not treated as part of the funding standard account credit balance when that balance is subtracted from the value of net plan assets. Thus, an employer’s election to reduce the funding standard carryover balance in 2008 will have the effect of reducing the amount that must be subtracted from the assets in determining the 2007 AFTAP for purposes of applying the presumptions under section 436(h)(3) as of the first day of the 4th month of the plan year beginning in 2008."

Mr/Ms 88, I did not comment on your methodology because I believe it is dangerous for you to support your proceeding in such fashion. There are actually 11 choices of interest rate to select and what you would use may not necessarily be what your actuary would recommend. That you were unaware of this evidences this point about being your own actuary. Effen's comment is well put: Even if you were able to determine the 2008 funded level accurately at 80+%, you couldn't certify it, and so the 60% funded presumption would apply anyway. The exercise only tells you what you already know -- you need someone to pick up the phone and talk to youl


There is no model notice? Then we'll be winging it I guess.

Andy, are you this serious all the time? Lighten up, dude. You risk giving actuaries the reputation of being humorless - ha. I realize my back-of-the-napkin approach is far less than 100% valid. My question is does it have greater than 0% validity. Since you did not dismiss it outright I'm disposed to think that there must be at least a little something to it. Those 11 segment sets - what's the one in the middle? If you don't dare quote it on an anonymous message board please post a link where I can view them myself. Geesh already.

Your quote from the proposed regulations - what does it mean in ordinary English? I went back and read the letter we received and my description, in my original post, of the way the 70% 2007 AFTAP was determined was accurate. Does it sound like our actuary's understanding of the calculation is correct or incorrect? If it's incorrect, what possible recourse does our new actuary have to be able to get the 2007 AFTAP up to 70%? Given that only the 1/1/08 asset value is known, how is the remainder of the fraction built?

I give you Scout's Honor (and a handshake) that I won't certify anything.

tuni88

#12 Andy the Actuary

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Posted 31 March 2008 - 01:46 PM

:shades: You assume I am a dude and not a dudess, which may or may not be correct.

1. Here are more rates than would fit on your match-book: http://www.datair.com/rates.htm

2. Absolutely no good can come of my commenting on your or anybody else's actuary because I am humorless and live in an old shoe.

3. I am not an attorney and do not interpret regulations, especially for match-sticks. I quoted them for Effen's/Penman's/AndyH's sake for unfortunately, they like me, may have genetic defects and understand the playing field on which this non-English discombobulation resides. If you do not understand them, however, you are well on your way to becoming a pension actuary.

4. You have noticed, no others have commented on your methodology as well. These are my shoemates and understand the boundaries of their soles. Your company is paying an actuary so if you choose to wallow in the morass of calculations, run the theory by YOUR actuary.

5. But, here's something practical you can tell your boss who perhaps is the one who is pressuring you into drawing conclusions (or perhaps, you are simply an adventuresome sort): "I have posted on professional bulletin boards and the responses indicate we are talking about highly technical computations that only an actuary should make. Our actuary has offered up only delay but we need to have an answer. Do you want me to have a "come to Jesus talk" with our actuary?

Now, I ask you, isn't this a riot?

6. I will honor you by making no further posts on your topic and using your post as a platform to preach to others. That was wrong and I apologize. I guess I only got involved in the verbal exchange because I am very lonely and eat 20 bananas a day. :shades:
The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

#13 Effen

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Posted 31 March 2008 - 02:04 PM

Andy the A - you are a riot - I love the way you worked the "limits of our soles" with a "come to Jesus" meeting.

Edited by Effen, 31 March 2008 - 02:06 PM.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

#14 tuni88

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Posted 31 March 2008 - 03:09 PM

Andy,

Not Andi, so assumed male. Sorry if I got it wrong. (Hmmm, guess that makes me a female.)

1. There are 4 sets of 3-segment rates in the link. Sets A and B - those on the left - are close to each other and sets C and D - those on the right - are kind of close to each other, but the two groups are quite different. I'm hoping one of the two higher sets are appropriate. When real actuaries (what - my CA designation doesn't make me a real actuary!?) go to do the AFTAP calculations from which set of rates do they choose?

2. Careful, you are beginning to exhibit humor. It might be too hard on your heart.

3. Scary thought.

4. Our actuary will say he got it rght. I'm here trying, sincerely, to figure out if maybe he got it wrong. Am hoping someone will opine on the methodology used in determining our 2007 AFTAP (see original post). If opine is too strong then they could maybe couch it in any terms that would make a cautious person feel safe.

5. Yep. Adventuresome. I try to get educated. (Witness my ambition in obtaining the Florida diploma.) I know more than a little about a lot of things. Makes you the life of the party and opens up all sorts of possibilities.

6. So you're not giving up on me?

tuni88

PS - Effen, Scouts Honor means forever and for everyone. No phooey, I won the BSA's God and Country Award. I'm not trying to certify anything - just going for a ballpark talking estimate of what might be our 2008 AFTAP if our 2007 AFTAP calculation turns up bogus.

#15 tuni88

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Posted 31 March 2008 - 04:34 PM

Whoops. Looks like the original post is not explicit in the method the actuary used to make the calculation of the 2007 AFTAP. Here's what he did (lifting this out from letter):

Took a bite out of the 1/1/07 credit balance and called it "forfeited" then formed the fraction for 2007 AFTAP as:

(Current Liability at 1/1/07 minus what's left of the 1/1/07 credit balance) / actuarial value of assets at 1/1/07 = .70

Smell OK?