Effen

Actuaries are held to various professional standards, so when you say "requirement", we are required to use "reasonable" assumptions. It is typical that small / tax shelter plans typically ignore non-retirement benefits. However, the larger or traditional retirement plans would typically have more explicit assumptions. Larger plans typically provide termination benefits, disability benefits, death benefits - all of these would have a probability assigned and a benefit valued. Tax shelter plans typically don't provide disability benefits, and typically assume no one will terminate or die prior to retirement. This is fairly common practice justified by administrative simplicity. The fact that you are trying to do an FASB valuation tells me it is most likely not a tax shelter situation and therefore, the actuary should review the plan provisions and determine if it is reasonable to ignore the non-retirement benefits. If the plan pays disability benefits, termination benefits, pre-retirement death benefits, those should most likely be explicitly recognized. Also, no offence intended, but if you are an actuary, and are asking these questions, you should also consider having a more experienced person peer review your accounting work.

You should show all expected benefit payments. If your assumption is that only retirement benefits will be paid, then that is all you should have in the expected payments. One might question if "retirement only" is a reasonable assumption, but that is a different discussion.

I found an AON presentation to referenced "highest early rule" of Reg. 1.411(a)-7©, but the words "highest early" don't appear in 1.411(a)-7©, so I don't really understand the reference either. http://www.aon.com/attachments/human-capital-consulting/New-Final-and-Proposed-Regs-on-Cash-Balance-and-Other-Hybrid-Plans.pdf

Lots of comments on this if you search the board and the internet, the short answer is, "no", you can't charge participants in db plans the way you can in dc plans. I am not sure if you statement was a typo, or if you really meant to say the "defined benefit plan does have individual accounts"? DB plans do NOT have individual accounts. They have hypothetical accounts that may be equal to the participant's accrued benefit. The assets of the plan support support all of the plan benefits. The plan is always either overfunded or underfunded. Money is not actually allocated to individual people unless the plan is being terminated. This is the main reason why participants cannot be charged administrative fees. Even in a QDRO situation, you cannot charge the participant fees related to the QDRO. I am not sure what you read that implied you could, but the DOL has been pretty clear about this as well.

True dat. However, if your document calls for the greater of AE of AB or age/service benefit, the AE of the distributed benefit could easily exceed the value of the additional age/service benefit and therefore, the net effect is no new accrual. The plan must contain this "greater of" language, otherwise, they would interpret it to be "both" the rollup and the age/service benefit. Either way, based on Ombskid's most recent post, it sounds like there were several problems. The "partial" distribution was not a permitted form of distribution, the "no accrual" may also be a problem depending upon the wording, and the lack of distributable event is most likely also be a problem. This sounds like a situation where he should amend the plan to make sure they allows for everything he did, then terminate the plan and tell him to cross his fingers and hope he doesn't get audited.

I don't believe the law allows for partial distributions from a db plan, but it is something on a lot of professional organizations wish list. It would be helpful for phased retirement. Probably the best you can do is have an in-service distribution at age 62.

Both. You determine his maximum 415 lump sum, based on the plan document and the applicable regulations, and compare that to his benefit under the plan. Most likely, the 415 maximum lump sum won't come into play, unless he is near the 100% compensation limit.

Even though you didn't ask a question, I will give you a question, that will lead to the answer. What does the plan document say?

I think we will just need to disagree on this. I agree there could be a disconnect between the lump sum ($105,000) and the "value" of the actuarially increased annuity benefit. However, I don't believe this is necessarily a problem, and I don't believe 417(e) has any place in this discussion, assuming the plan has always been an account based benefit formula. There is nothing wrong with your interpretation, and a document could be written to require it, and it would certainly be the conservative approach, but I don't believe it is only acceptable method.

Thank you. The "greater of" formula in this site only applies if your plan has a split benefit, where one piece is based on a traditional db and the other piece is based on a hybrid formula. This provision specifically mentions that the piece of the accrued benefit based on the hypothetical account is not subject to 417(e), whereas the piece based on the traditional db is subject to 417(e). These provisions are the reason you can't "set it and forget it" when you convert a traditional plan to a hybrid plan. The whole point of (b)(1) is to state that hybrid plans are not subject to 417(e). Section 1(b)(4) provides exceptions to that rule when the current hypothetical account was created by converting a traditional db into a hybrid.

Can you provide a site for this? I think your final paragraph accurately describes the problem. There is no clear guidance what you need to do post NRD on a hybrid plan. All they have said is it must be a reasonable adjustment.

FWIW, there is a very similar and much longer discussion currently going on about this topic on the ACOPPA Board. I think what is comes down to is the meaning of 1.411(a)(13). From the preamble of the final hybrid regs it states: "Under these final regulations, a cash balance formula or PEP formula is treated as a lump sum-based benefit formula to which the relief of section 411(a)(13)(A) applies if the portion of the participant's accrued benefit that is determined under that formula is actuarially equivalent (using reasonable actuarial assumptions) to the cash balance account or PEP accumulation either upon attainment of normal retirement age or at the annuity starting date for a distribution with respect to that portion." The question is, what is reasonable. I don't think we need to go as far as FAP suggests, although that would certainly be safe, but I do think you may need to give more than a standard interest credit. Is more guidance expected? Doubtful, considering how understaffed the IRS is and the fact that it took them how many years to give us these final regs? They will wait for an egregious test case, then bang them on audit.

You may want to take a look at 1.401(a)(4)-5 regarding the timing of an amendment. Also, those employees who terminated last year have likely not had a break in service yet, and certainly not a 5-year break, so there is another argument that they should be included.

Just as an FYI, the IRS has started to rattle their saber around this issue. They have said the post retirement actuarial adjustment on the cash balance account must be "reasonable", and they have implied that simply giving an interest credit equal to the 30 year treasury is most likely NOT reasonable. In your example your crediting rate is 5% - is that reasonable? I don't know, but since you are crediting the annuity with 7%, you might want to consider using the same rate for the cash balance plan.

I agree with Andy that I think the answer is A. I have heard some people speak that B, or some form of B may be possible, but it seems to me you couldn't pay a retroactive benefit prior to a time when the provision existed in the document. C is just wrong - you cannot pay a benefit greater than 100% of comp, however, if the plan contained a COLA, you may be able to adjust the benefit post commencement, or something like that?? Also, I am not saying this is "your" problem, but we are seeing a lot of this kind of thing when we take over work, especially from TPA firms without an actuary. Personally, this is most likely just the result of bad consulting. Deductions are only valuable if they can get they can get the money out of the plan. I am sure he will take comfort in the amount he saved on admin fees while he stokes a 50% excise tax check to the IRS. Consider raising compensation, or hiring additional employees - maybe spouse or children to absorb the excess.

I wasn't aware of the consensus opinion that different assumptions are not permitted. We have prepared several lump sum windows where different assumptions were used. None of the plan's have been audited, but we had fairly strong ERISA counsel in each who were ok with it. We also did it many years ago in the plan termination situation, that was audited by the PBGC and they specifically looked at this issue and determined it was ok. If there was no lump sum provision for participants over $5,000/$1,000, then I don't see how the IRS can argue you can't have a different basis for lump sums. As long as it isn't discriminatory, I don't see any problem with it. I guess I am saying, we have done it many times and have never had a problem, but if the IRS is saying something different from the podium, you may need to at least consider what they are saying.

I think as long as your methodology doesn't change, it isn't a problem. In other words, if your AE reference the current 417(e) interest rate and/or mortality table, than you are ok when that table/rate changes. However, you may have a problem if you ever want to change the definition of AE to be something other than 417(e).

No cutback issues prior to NRD - this is clear from the Regs. Post NRD seems to still be a bit questionable. Current IRS direction is that there must be a reasonable adjustment and a simple interest credit is most likely not reasonable enough. 1.411(1)(13)-1(b)(2)

yes, but you really need to be careful and have a very solid understand of the testing process. All the major small plan vendors have a product that is fully capable of handling the testing. They are also fully capable of producing garbage, when given garbage to work with. The user still has to know the difference.

I think it somewhat depends on what you intend to do with these people. If you intend to turn the over the the PBGC as a lost participant, you will need to satisfy them that you did a diligent search. Also, keep in mind the amount you will need to turn over to the PBGC to cover their liability can be significantly more than the assumed lump sum payment. Don't let the sponsor fall into the trap of thinking they don't really need to look because the PBGC will take them. This ultimately will be a very expensive solution between the added liability, and all the extra admin necessary to jump through the PBGC hoops. I wouldn't worry too much about the 60 requirement, but you certainly should be looking by then very early in the process and keep searching throughout the process. If the PBGC isn't satisfied with what you did, they will make you do more, which will delay the entire process.

Well, you need to check the document to make sure they aren't using some sort of market rate of return crediting, but I generally agree that they most likely are not appropriate. However, as we know, the Ned Ryersons of the world never let appropriateness get int he way of a good sale. Probably the best way to proceed is to simply explain how the plan works to the owners. Explain how all of the assets support all of the liabilities and that individual policies are basically meaningless to the funding. Also explain the non-discrimination rules regarding insured death benefits and explain how they need to provide the same benefit to all other participants. I know some of the insurance companies were pushing these products a few years back, but a few got wise and required the actuary to sign off. This ticked off a bunch of agents because most actuaries refused to agree to the appropriateness of the investment. But that didn't necessarily stop the transaction from going through. Good luck. Make sure you are getting properly compensated for the clean up, because you know the agent who sold it certainly did.

I think you would use the plan termination date - not the distribution date or the end of the year.

Based on your earlier post, the 62 retirement age only applied to post 2009 accruals. The benefits that were accrued prior to 2009 still have an age 55 retirement age attached to them. You cannot change the retirement age of an accrual since it is a right and feature of the benefit when earned. The benefit was payable at 55 when it was earned. You can't just change that to 62. That would be an impermissible reduction of value. Therefore, if someone with a pre 2009 accrual, works beyond age 55, you need to deal with the late retirement issues associated with those accruals. Accruals earned after 2009 are different because the retirement age is 62. Even though they are unreduced for early at 55, you don't have to adjust them between 55 and 62 because it is an early retirement subsidy and not the normal retirement benefit.

Also be careful if he works or defers his benefit beyond age 55, he would either need a suspension notice, or he would need to receive an actuarial increase, or both an accrual and an increase. It depends on what the document says. Changing the RA is a nice solution for valuation purposes, but it makes benefit calcs very complex.

These are different criteria. 401(a)26 is satisfied if more than 40% "benefit", since they don't benefit, they cannot be counted. 416 only references "participants". Since they are a participant, they must receive the TH minimum.