Guest seissler Posted February 21, 2005 Share Posted February 21, 2005 A 412(i) defined benefit plan has a benefit formula of 100% of compensation reduced 1/25 for years of participation less than 25 years. The participant will have 30 years of participation at normal retirement date, and benefits accrue pro rata over years of participation. The participant's compensation is $50,000. Therefore a deferred annuity is set up for $50,000/year beginning at normal retirement date. Level annual premiums are paid from now until the year of normal retirement. Compensation is 3 year average compensation for years of participation. Next year the compensation is $45,000. I assume I am now funding for a benefit of ($45,000 + $50,000 /2). How is the adjustment made to decrease the benefit at retirement? Can a deferred annuity be set up assuming a salary scale? Or is a deferred annuity purchased each year for only the amount of the benefit accrued that year? - and if so, how does that tie in to the requirement for level annual premiums for funding? Susan Eissler Link to comment Share on other sites More sharing options...
could be me maybe not Posted February 22, 2005 Share Posted February 22, 2005 Calling Dom Firmani........... Link to comment Share on other sites More sharing options...
Guest Carol the Writer Posted February 22, 2005 Share Posted February 22, 2005 First of all, I am Dom Firmani's in-house actuary, and I have a few comments. Dom is out selling 412(i) plans, and is presently unavailable. You do not buy a deferred annuity for the benefits accruing during the year. That would be unit credit funding. You do level "premium" funding for the anticipated normal retirement benefit. Note that a salary scale is not used here. As far as recognizing decreases is concerned, our prototype plan - the Datair prototype - does not recognize decreases until they have been in effect for three years. I do not have the cite handy, but I'm pretty sure that's standard in the insurance industry. Link to comment Share on other sites More sharing options...
Guest seissler Posted February 22, 2005 Share Posted February 22, 2005 So there really isn't much for a TPA to do. Just determine eligibility, normal retirement date, calculate the normal retirement benefit, and vesting. The insurance company determines the level annual premium and cash value at the time of distribution (if lump sums are permitted.) Correct? Link to comment Share on other sites More sharing options...
Guest Carol the Writer Posted February 22, 2005 Share Posted February 22, 2005 We, in our rol as TPA, compute the contributions, as well. We have the annuity tables, pre-retirement assumptions, and life tables loaded into our system for the companies with whom we do business. These tables and assumptions were approved by the particular insurors. And the insurance companies say (I emphasize, say) that they will be bound by our computations. We haven't experienced a problem as of yet. (By the way, we also compute the excess interest and any forfeitures that arise to offset the subsequent year's contributions.) Hope that helps. Link to comment Share on other sites More sharing options...
Guest seissler Posted February 22, 2005 Share Posted February 22, 2005 So, the plot thickens... I was under the impression that there were either individual deferred annuities or a group annuity contract that governed the premiums and cash value. Are you making calculations within the framework of such a contract, or there is no contract? Link to comment Share on other sites More sharing options...
Guest DOM Posted February 22, 2005 Share Posted February 22, 2005 Here we go again!!! Since the embarrassing dialog perpetrated on the members of this site by myself, Andy and Blinky months back when the three of us vented our immaturity discussing the attributes of 412i plans, I have been very quiet and frankly seldom visiting these boards. Carol The Writer has encouraged me to read todays postings and I always follow orders from my actuary, lo and behold I find a reasonable question presented by Seisaler and an equally reasonable reply from Carol. Unfortunately also found is another example of an arrogant, self serving, uninformed and frankly dumb remark from "quint the shark hunter" proving once again that my decision to remove myself from these discussions was sensible and sound. However when you consider the handle "quint the shark hunter" derives from the book and picture "Jaws" and further remember that Quint ended up as shark dinner this all makes perfect sense. By the way, Seisaler, your follow up question regarding the use of individual and/or group deferred annuities is correct. The annuity purchase rates in the contracts are the same as in our software. Goodbye again... Link to comment Share on other sites More sharing options...
mwyatt Posted February 23, 2005 Share Posted February 23, 2005 Hey Dom: Not trying at all to be snide or anything of the sort, but I'm surprised that the insurance company doesn't have final say on the amount of premium due on the annuity contracts. My impression from the TPA side is that it is all well and good to calculate the numbers given tables etc., but the final bill (and overriding check) would come from the insurance company. What's a decimal point between friends, as they say... Link to comment Share on other sites More sharing options...
AndyH Posted February 23, 2005 Share Posted February 23, 2005 Dom or Carol, do the policies cover top heavy benefits? And, BTW, Carol's comments are always sensible and civil. No surprise there. Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted February 23, 2005 Share Posted February 23, 2005 Here we go again!!! Since the embarrassing dialog perpetrated on the members of this site by myself, Andy and Blinky months back when the three of us vented our immaturity discussing the attributes of 412i plans, I have been very quiet and frankly seldom visiting these boards. I want to know what I ever said to Dom, but whatever. Regarding the premium, I do happen to know a little bit on how it works. If the insurance company is setting up a 412(i) plan and they don't do the calculations in house, they will use "preferred TPA's". These TPA's sign contracts with the insurance company which shift the liability of the calculations to the TPA. The insurance company provides all the information related to their contracts to the TPA who then prepares the calculations and informs the client how much to deposit. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
Guest seissler Posted February 23, 2005 Share Posted February 23, 2005 Does the same go for lump sum distributions, or does the insurance company calculate those? Link to comment Share on other sites More sharing options...
AndyH Posted February 23, 2005 Share Posted February 23, 2005 Good question, as is mine, which is as yet unanswered. Link to comment Share on other sites More sharing options...
WDIK Posted February 23, 2005 Share Posted February 23, 2005 I want to know what I ever said to Dom In summary: 1) indicated that dom was "a bit combative." 2) classified dom as not being a bad apple. 3) inferred that dom was a black kettle. Perhaps Blinky could be accused of being too metaphorical, but probably not "embarassing". ...but then again, What Do I Know? Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted February 23, 2005 Share Posted February 23, 2005 Thank you for the summary. The plane is sluggish like a wet sponge. (There is a simile for you, although it's a completely random statement, it is a paraphrased movie reference.) "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
could be me maybe not Posted February 23, 2005 Share Posted February 23, 2005 Careful Blinky. In the immortal words of Moe Howard2, I realize that Blinky may be the Boss Hog in these boards, but I would suggest that he, and others like him, follow in the steps of of Tom & WDIC who seem to have something of substance to say in their replys. Endless replys which lack substance lead to lack of credibility. No one benefits. Sounds a bit like your friend GBurns, doesn't it? Perhaps you might wish to answer seissler and qtsh's questions? Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted February 24, 2005 Share Posted February 24, 2005 I can try Dom or Carol, do the policies cover top heavy benefits? This depends on the policy. If the benefits accrued under the plan are greater than TH, then yes. If they aren't then a side fund is needed. Of course then you need to go and get yourself an actuary. Does the same go for lump sum distributions, or does the insurance company calculate those? I think nearly all 412(i) plans describe the PVAB as equal to the CSV. (I know there was one question on these boards recently where that wasn't the case, but I attribute that to a crappy document.) Thus, it really is as simple as a DC plan that provides annuities. I think generally if the TPA is calculating the contribution, they will be handling this aspect as well, although it depends on the individual arrangement. So how's that Sybil? "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
could be me maybe not Posted February 24, 2005 Share Posted February 24, 2005 Very informative, thank you. Now we'll consider you to be the resident 412(Eye) guru. Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted February 24, 2005 Share Posted February 24, 2005 And that's I title I strive to have. Just please don't forward any fliers you receive from me to the government in a little brown envelope. It's really is legit when I promise a 25 year-old a 2 million dollar deduction. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
Guest Carol the Writer Posted February 24, 2005 Share Posted February 24, 2005 To answer your question about top-heavy, I think that's one practical reason that the 412(i) plan cannot be funded exclusively with life insurance contracts without requiring a side fund and a Schedule B. The annuity computations with only incidental life insurance have always assured, in every plan that I have seen thus far, that tha annuity cash values are at least as great as the lump sum equivalent of the top heavy benefit. Does that make sense? Link to comment Share on other sites More sharing options...
could be me maybe not Posted February 24, 2005 Share Posted February 24, 2005 I think that's one practical reason that the 412(i) plan cannot be funded exclusively with life insurance contracts without requiring a side fund Carol, then it is not a 412(i) plan at all, is it? If you put some fancy stuff inside a safe harbor plan then it is not a safe harbor plan at all. What you describe is a DB plan with life insurance in it, right? And doesn't that make fiduciary considerations important, i.e. diversification of assets among other things? But I do not follow your last two sentences. Link to comment Share on other sites More sharing options...
Guest Carol the Writer Posted February 24, 2005 Share Posted February 24, 2005 I would make a distinction between the safe harbor design of the plan's benefit structure, and the method of funding. The former is directly related to discrimination testing, but is also a function of the funding instrument chosen, in that contributions to the plan are related to the actuarial assumptions (annuity rates, etc.) specified by the insurance company. The method of funding is subject to fiduciary concerns - and that does not include benefit adequacy or who might or might not get benefits. The perspective of ERISA might be that insurance companies are "safe" and, therefore, are not as explicilty subject to fiduciary concerns as are ordinary defined benefit plans. Does this make sense? Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted February 24, 2005 Share Posted February 24, 2005 Carol, I have to say I didn't understand either of your last two posts. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
mwyatt Posted February 25, 2005 Share Posted February 25, 2005 Safe? Executive Life, Mutual Benefit, Baldwin, Fred's Bait and Tackle & Insurance... Having all eggs in one basket isn't exactly safe. Link to comment Share on other sites More sharing options...
Lame Duck Posted February 25, 2005 Share Posted February 25, 2005 I think Carol was saying that some 412(i) plans are funded exclusively with life insurance contracts, and these life insurance contracts will be used to provide the full retirement benefit. In this case, there may be a need to provide a side fund to cover the top heavy benefit since the cash value of the life insurance may not be sufficient to provide it. However, in cases where the retirement benefit is funded with annuity contracts and the plan provides only incidental life insurance coverage, the annuity contracts will usually be sufficient to cover the top heavy minimum. Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted February 25, 2005 Share Posted February 25, 2005 Well I hope neither she nor you are saying that a plan could be funded exclusively with life insurance because that will surely violate the incidental benefit rules. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now