Effen

This is the kind of thinking that drives me batty! Why throw away $20 million? So what you are saying is this employer would rather terminate the plan and either give a large chunk of the excess assets to the participants (without really getting anything in return) or give a significant portion to the feds in excise taxes, or probably both. Instead of using the excess assets to negotiate higher benefits or to pay for future cost of benefits as they are earned (without having to make cash contributions), he would rather terminate it and send real cash into a 401(k). Add to that the fact that he would be giving a bunch of lunch box guys the responsibility to invest their retirement savings instead of building better widgets. Statistics prove over and over that participants do a poor job of investing, let alone the loss of productivity due to the added responsibility. I say, use the excess assets to provide better or future benefits. Accomplish that through negotiations where you get something in return. Closely monitor the excess on a termination basis and then shut it down when there are no excess assets and no shortfall. If "everyone" wants a DC plan, freeze the db, make the future accruals in a cash balance so it looks like a dc so everyone gets used to the concept. Once all the excess is used up through cash balance accruals, terminate the db and make future dc contributions equal to the previous cash balance accruals. And hire a better consultant...

The PPA structure just brings lump sums back to a more reasonable value. Prior rule (PBGC, 30-yr Treasury) both started out reasonable, but as market conditions changed they both started to produce redundant lump sums. Theoretically, the lump sum should represent the present value of the annuity based on market conditions. If there wasn't any advantage to the participant, or penalty to the sponsor, lump sums would be a non-issue. The change to the PPA structure is the latest attempt to produce a reasonable lump sum. Using the 30-yr rates or the PBGC rates participants could take a lump sum, and then turn around and purchase an annuity to provide a monthly benefit higher than the actual accrued benefit. That shouldn't be allowed to happen. So, yes, knowledgeble participants may be upset, but shame on Congress for creating a system where employers were forced to overpay. Now, if we could only get them to do something about the excise tax on reversions we might be able to actually help the retirement system...

FWIW, I completely agree with Andy that "A fundamentalist reading of the proposed regulations would say 'no'", but I stop there and say, ok, then NO it is. Personally, I don't really have enough time to do the AFTAP Certs, Benefit Restriction Notices, Annual Funding Notices, and PBGC premiums that all seem to be due on 4/30, so I'm not going to waste time doing additional notices just to be on the safe side. Does anyone really think the IRS will have a leg to stand on if they decide to prosecute someone for not giving a second notice? They will have much bigger issues to deal with.

But I would argue that those two statements are mutually exclusive. If the crediting rate is based on the 30-yr Treasury, how can the actuary argue that the segment rates (high grade corp bonds) are his/her best estimate of future crediting rates? Treasury rates and corporate bond rates are certainly not equivalent. I would argue that if that is your assumption, you are outside of the box of acceptable.

That would work, IF you were permitted to do it. Then again, you might be permitted to do it, but it wouldn't satisify the "market rate of return" requirements and therefore you would be open to age discrimination and whipsaw type lawsuits. For CCH:

I agree. Carrots answer does not work in the post PPA world because of the requirement to use segment rates / yield curves.

No final regs, no real guidance. It's really all "good faith" compliance for 2008 & much of 2009. I think your actuary is taking a valid, but conservative approach. In fact, we were taking a similar approach earlier last year. However, I think that many actuaries now take the position that the "at-risk" liability in a cash balance plan that pays lump sums equal to the hypothetic balance when a participant terminates, should be equal to the sum of the hypothetical accounts. Therefore, the "at-risk" liability would equal your "termination liability" and since the maximum deductable contribution is based on the "at-risk" liability and not the funding target, a first year contribution equal to the sum of the hypothetical accounts would be fully deductible. This approach isn't 100% guaranteed, but it seems to be a very common interpretation.

OK, I think I'm on board with the "subtract the credit balance crowd". ERISA section 302(d)(8)(A)(ii) says the "value of the plan's assets determined under subsection ©(2)" and 302©(2) states "For purposes of this part, the value of the plan's assets shall be determined on the basis of any reasonable actuarial method of valuation which takes into account fair market value and which is permitted under regulations ..." HOWEVER, 302(d)(8)(E) states that "For purposes of this subsection, the amount determined under subparagraph (A)(ii) shall be reduced by any credit balance in the funding standard account" So, all that said, I think the language in Appendix C is still misleading to the participant. Do you think it would violate the safety of the model notice if you reduced the 2007 & 2006 assets by the credit balance, but also provided additional information regarding the actual funded status of the plan?

I think I'm coming down on Andy's side on this. I don't see anything in Field Assistance Bulletin No. 2009-01 that implies I should subtract the CB out of the 2006 OR 2007 assets. When I show the 2008 numbers in chart format the PFB & COB are clearly stated. In addition, there is an explanation that the AFTAP is not a true reflection of the funded status because the FPB & COB are taken out of the assets for the calculation. The numbers are all there for a participant to do the math and see the plan's real funded %. However, in Appendix C for 2006 & 2007 you are simply stating the assets and liabilities and the funded %. You aren't providing any information about the CB. Therefore, if you deduct the CB from the assets it seems that you would be misleading the participant into thinking the assets are less than they really are and the plan's funded percentage is less than it really is. Where are people getting the idea that you need to subtract the CB from the 2006 and/or 2007 assets for this Notice?

You are getting conflicting information because no one really knows because there is no guidance from Treasury. Ultimately, it will be a document issue. Here is a recent discussion what to pay Don't hold your breath...The bulk of the proposed 430 and 436 Regs were released around 8/31/07. I don't have a free link for you, but someone else might.

At this point I would say the consensus is "no". There is apparently nothing in the Code or proposed Regs that implies the maximum should be adjusted for interest to a point other than the valuation date. Therefore, a beginning of year valuation would have a beginning of year maximum with no adjustment for later payments. At the session I was at where the question was asked, the IRS gave a "no comment".

Andy, I'm not sure I understand your question?

Nope, nope Not really, although most I talked to seemed to think it is ok to use an "at-risk" that is equal to the sum of the hypothetical accounts - but there was nothing official. PBGC is still saying they want to notification of any missed quarterlies including small plans.

If you have specific questions I might be able to tell you what I heard. The gray book was very good and answered a lot of AFTAP/Notice type issues, definitely worth getting a copy.

Yes I know it sounds easy, but it is fairly complex. To will try to simplify. Let’s assume a plan year beginning 1/1/2009. If the actuary can't (or doesn't want to) certify the actual 2009 funded status (AFTAP) prior to 4/1/2009, they will use the 2008 AFTAP, minus 10%. They must certify the actual 2009 AFTAP prior to 10/1/2009 or the plan is deemed to be less than 60% funded. So, let’s say 2008 AFTAP was 95% and therefore no restrictions were in place for 2008. You come to 4/1/09 and think your 2009 AFTAP will be around 55%. If the actuary does not certify the 2009 prior to 4/1, it is deemed to be the 2008, minus 10% or 85% and no restrictions will be in effect until 10/1/09 or whenever the actual 2009 is certified. Once the actuary certifies the 2009 AFTAP, benefit restrictions will be in effect starting on that date. Now let’s say the 2008 AFTAP was 85%. No cert is done on 4/1/09 so the 2009 is deemed to be 75% and benefit restrictions apply on 4/1/09. Then, on 10/1/09 the actuary certifies the actual 2009 AFTAP at 55% and all lump sums are stopped and the plan is frozen. There are LOTS of complications with prefunding balances and carry over balances that make this very complex, but there isn't enough time/space to cover the details. Basically, the 2009 AFTAP drives the 2009 benefit restrictions, but there are times when the prior year's AFTAP is used.

Interesting that you would say that Andy. I was at an "inconvenient truth" session with Tonya Manning (AON) and Don Segal. There was a fairly long discussion regarding bifurcation and the problems created. Don's opinion was the participant elected the lump sum, but the law wouldn't pay it. Therefore the question is how to pay it later? Tonya and many in the audience looked at it my way that it was two separate elections. I think Don wanted to apply a restricted benefit approach similar to a top 25 distribution. If there is one election then how do I determine the value of the lump sum if it is paid later? If it is new election, is it a new annuity starting date? If so, how does the J&S waiver effect things. Does the spouse need to waive again? What if there was a divorce, does new spouse have to waive? What about a death? I think everyone agreed that there should be no 2nd bite at the apple, but there was a lot of confusion about valuing the 2nd lump when it becomes payable. I agree it is a document issue, but it isn't an easy question - there are lots of things that should be specified in the document.

You might be thinking of the funded status for multiemployer plans (Endangered, Seriously Endangered, and Critical). Those had to be filed with DOL and they are public on the DOL web site. AFTAPs did not have to be filed with IRS, although as myatt stated, they will eventually become public once the Sch. SB are released into public domain.

What if we changed Xerxes facts slightly 1/1/2008 Results FT = 10,000,000 AVA = 9,000,000 FSCB = 1,000,000 Funded Ratio = 90%, so NOT exempt from restrictions in 2008. AFTAP = 80% If I do not certify a 2009 AFTAP by 4/1/2009 am I deemed to waive my $1,000,000 FSCB so that my 2008 AFTAP becomes 90% so that 90% - 10% = 80% and restrictions don't apply on 4/1/2009? Or, do I need to get the sponsor to elect to waive it so restrictions don't apply I guess the question is does the deemed waiver reach back into the past year if the current year hasn't been certified?

"Yarp"

I think the difference between (1) & (2) would be a document issue. The document would need to define what options are available to the participant and would need to define how each is determined. I think I would recommend that only option (2) would be available, with the added option of an immediate annuity w/ no lump sum conversion. Basically defer the option on the annuity piece or take the annuity, but if you take the annuity, you won't be able to convert it to a lump sum later. Again, I'm not saying this is the only way, it just seems to make the most sense to me and would be the easiest to work with in the future.

I know some of these have been asked before, but I'm looking for consensus. 1) Lets say my 2008 AFTAP is 75% and my 2009 AFTAP is 65%. I gave the appropriate notice in 2008. Do I need to give another notice in 2009 even though nothing changed? The statute says the notice is required "after the plan has become subject to a restriction". I was subject to the restriction in 2008, nothing new in 2009, so it seems that no additional notice is required. Agree? 2) Lets say my 2008 AFTAP was 85% and the 2009 AFTAP is 75%. My plan only pays lump sums less than $5,000 and therefore the restrictions have no practical impact. Do I still need to give a notice? I think the conservative answer would be yes, but does everyone still agree?

Personally I think it will be a document issue. The attorney's we work with are basically telling us to pick something, document it, and then when appropriate they will amend the plans to fit what we have decided. My thinking is that this participant is still entitled to $1000/ month at 65 and an unreduced at 62. (I assume he would also be entitled to some immediate annuity since you offered him a lump sum.) Either way, once restrictions are lifted why wouldn't you just determine the lump sum value of the $1,000 based on your normal procedures? If the plan's lump sum provisions include the value of the subsidy then (b) {using a62}, if not, probably (a). I don't like © or (d) because they could potentially violate 417(e). I guess I wouldn't look at it like he received 50% of his lump sum. I would look at it like he received the value of 50% of his annuity as a lump sum and therefore he is still entitled to 50% as an annuity. The lump sum value of that would be determined if and when it becomes payable in that form.

This was posted on the COPA board today. Not sure it will help, but rumors are always fun to discuss....

One reason would be the need to use of multi decrement fully iterative systems to determine plan liabilities. Typically firms that do only small plans use software designed for small plans (ASC, DATAIR, etc.) Firms that do work for larger plans use software designed for larger plans (Proval, Lynchval, etc.). These larger plan systems are generally fully iterative. In other words the liability for any expected decrement can be isolated in any future year. Therefore, when the client asks you to determine the value of a change in the early retirement or disability factor you can determine the true cost of the change. In addition, you can change the retirement scale to account for the increased or decreased utilization. Also, keep in mind that you are required to have assumptions that are independly reasonable. In other words, if the plan has a disabiilty benefit you are suppose to have a reasonable disability assumption. It is difficult to know your assumptions are reasonable if you can't isolate them. I know the small plan software providers will argue their systems will do it, but they generally use approximation techniques and do not do it directly. Another more basic reason is what SoCal pointed out. If you only deal with small plans you won't know what you don't know regarding larger plans. You will be getting a different type of question from various levels inside the company. The president of the company, the CFO, the auditor and the lawyer could all ask you the same question, but each would have a different reason for asking and you would need to know how to talk to all of them. No, the math and funding concepts aren't really any different, but the application and information required can be dramtically different.

I agree, different animal, different problems. Just becuase you are a good rabbit hunter doesn't make you a good deer hunter. You should take a look at the actuarial standards of practice and make sure you are qualified to do the work under the standard. Any you probably should increase your E&O coverage.