415 Limit question

[Guest htatuaca2]

Can someone please help me with this question from the sample exam?

Calculate the maximum annual benefit for a participant at Social Security and normal retirement age in 2002 based on the following information:

Maximum Dollar Limit for 2002 $160,000

3-year annual compensation average 170,000

5-year annual compensation average 150,000

Years of service 9

Years of participation 8

I thought the answer was $128,000; but the answer key says the correct answer is $144,000.

I though I understood this, but now I am totally confused!!! And I am taking the exam on the 13th, so please answer back soon if you know the answer!!!

Thanks.

[stephen]

Just a thought, have the db 415 rules changed since 2002? If yes that could explain why you are coming up with a different answer as the question you list is from 2002.

That is one of the problems when using old materials to help study for a pension exam.

[Guest htatuaca2]

No, the question came from the 2005 sample exam posted on the ASPPA website.

[Belgarath]

Beats me. I would have come up with the same answer you did. My understanding was that where the years of participation are <10, then the 415 limit is the lesser of comp limit adjusted for service, or dollar limit adjusted for years of participation. So I come up with a choice of 128,000 or 144,000, with the lesser being 128,000.

I don't do valuations, so I'll be interested to see what someone who does DB plans will come up with to point out where we're going wrong. I'm sure there's a quirk somewhere that I either don't know about or haven't considered.

Good luck on the exam!

[Guest DBtech]

The Dollar limit is reduced for years of service with the employer instead of participation for tax years after 12/31/1999. P.L. 104-188

[Belgarath]

Are you sure? Again, I don't do DB valuations, but I read 415(b)(5)(B) to apply to the compensation limit, (using service rather than participation as you mention,) and not to the dollar limit. Anyone else have an opinion on this?

[Lame Duck]

Belgarath,

I agree with your interpretation of 415(b)(5)(B). I'm not an actuary but work a lot with DB plans and I thought the answer was $128,000. I put the problem up on my old DB calculator for 2002 and came up with $128,000 as the maximum contribution. If this is wrong, I would really appreciate one of the actuaries straightening this out.

[rcline46]

I would have answered $128,000 also. ASSUMING the answer key is correct....

The 100% of pay limit is reduced 1/10 for service. $170,000 at 9/10ths is $153,000.

The $ limit cannot be accrued faster than 1/10 per year of participation. Accruing $16,000 over 8 years is $128,000.

The $144,000 can only be arrived at by doing 9/10ths of $160,000. Ok, I am stumped also.

[Mike Preston]

I believe the answer key is FUBAR. I agree it should be $128,000.

Anyone want to take a gander at the following (a subsequent question on the same sample exam):

Given the IRC § 415 dollar limit of $170,000 for 2005 and the following table of values, which of the following represents the IRC § 415 dollar limit for a participant commencing benefits in 2005 at age 65 under the plan’s normal form of payment?

The plan’s normal form of payment is a life annuity with 5 years certain.

(Choose the answer closest to your calculations.)

Plan Actuarial Equivalence

Interest

....7%

APR65, Life only

....110.91

APR65, Life with 5 years certain

....112.60

Prescribed Interest and Mortality

Interest

....5%

APR65, Life only

....128.22

APR65, Life with 5 years certain

....130.02

A. $167,449

B. $167,647

C. $170,000

D. $172,387

E. $172,590

Does anybody think that D. $172,387 is the correct answer?

mike

[rcline46]

Oh boy, Oh boy, Oh boy. It looks like:

1. An Actuarial Equivalence answer was derived from 417(e) (prescribed) rates.

and

2. A benefit in excess of 415 was created, when the rules are that the benefits are required to be 'equivalent' in value to the Life Annuity. IE, the fraction was upside down!

No, I do NOT think that is the correct answer!!!

[Guest htatuaca2]

Thank you all so much for your replies!

I talked with someone at work, who works on DB plans, and she also agreed the answer should be $128,000. And yes, I was also confused on the subsequent question you mentioned. I thought the answer was A. $167,449. Is that right?

I think what I should do is email someone on the E&E committee and ask them to review these questions. Then I'm going to hope that if these appear on the actual exam that enough people will have answered with the same (actually correct, but scored as incorrect) response that the results will be reviewed.

[Tom Poje]

note: at the end of each chapter in the study guide there is a sheet (or should be a sheet) for submitting comments, etc. granted there are no such sheets for the exam, but either e-mail or use one of the sheets and fax over your comments. they do correct mistakes, and there is a list of known 'errors' available on the ASPPA website

http://www.asppa.org/education/ed_study_guide_updates.htm

if you run into a similar question on the exam, I would remember what question number it was and after completing the exam, contact ASPPA about the particular question. you are not allowed to remove scrap paper from the testing center.