david rigby

Probably just tired of the fruitless arguments.

I will try to offer a generic explanation of what I think is going on. I'll start with some basic background and apologize in advance if it seems redundant. Background A defined benefit pension plan promises the payment of a monthly income to the participants for lifetime, beginning at retirement, usually age 65. The amount of the monthly benefit is determined by a formula contained in the plan. The formula takes into account the compensation and service of each participant. In the case of most Plans, retiring employees may choose the form in which the benefit is received: several different forms of monthly options, or perhaps a lump sum equivalent. Sometimes this lump sum equivalent is available only for "small benefits", if the lump sum is $5,000 or less. Company contributions are deposited into a trust fund, invested by the pension plan trustees and, based on the instructions of the plan administrator, withdrawn to pay benefits to retirees. The minimum deposit is calculated annually and certified by the Enrolled Actuary. In order to make such calculations the Enrolled Actuary must make several assumptions about future events and patterns, such as the average investment return for the trust, expected salary increases for employees, and expected rates of turnover. Another assumption is that, unless there is evidence to the contrary, the Enrolled Actuary should assume that the Plan will continue to exist. This is important because it forces the other assumptions to be focused on a long-term outlook rather than just a one or two year horizon. However, due to requirements in the tax laws, the assumptions used for determining a plan's *funding* requirements are usually different from the assumptions used for determining the value of a lump sum actuarial equivalent. This is because the tax laws establish certain procedures for determining the minimum value of a lump sum. Valuing Lump Sums A generic description of a lump sum payment is the present value of all future monthly benefits (assumed to commence at Normal Retirement Date, usually age 65) based on a set of assumptions with respect to future investment earnings and future patterns of death. For the purpose of determining lump sums, your Plan probable originally specified the use of assumptions which are generally "conservative". These assumptions were the minimum specified in IRS regulations prior to 1994 (changes after 1994 discussed below). Generally, using these "old" assumptions, a lump sum payment was artificially high when compared to current market conditions. In 1994, as part of GATT, Congress passed the Retirement Protection Act of 1994. Included in this law is a provision allowing plan sponsors to modify (by plan amendment) the actuarial assumptions used for determining lump sum equivalents to better reflect the current market conditions. Plans *could* adopt such provisions, which are applicable only for determining a minimum, after the law was passed. However, plans *must* adopt such provisions by the 2000 plan year. At the time such assumptions are adopted, "grandfathering" the lump sum amounts immediately prior to adoption is permitted but not required. Thus, the conservative assumptions are replaced by market assumptions. For example, one of the new assumptions is an interest rate related to a monthly average of 30-year Treasury securities. The rate so specified (in the adopting amendment) can vary either monthly, quarterly, or yearly. The use of the old assumptions may be appropriate if the Company is trying to maximize the lump sum amounts for participants; the use of new assumptions may be appropriate if the Company is trying to minimize such lump sums. Amounts in between are permitted. Plan Amendment Based on your statements above, it appears that your Plan has been amended to adopt these provisions without any grandfathering. Thus, the use of market-related assumptions eliminate most of the built-in subsidy for lump sums. My own interpretation of this is to describe it as a desire not to maintain an inherent subsidy to the lump sum form of payment since the primary purpose of a defined benefit plan is usually to pay retirement income in the form of monthly benefits. [This message has been edited by pax (edited 02-05-2000).]

Try a search on the word "embezzle" or similar words. There are 2 or 3 messages where this has been discussed.

"It is my position, and has been for many years, that under the guise of guaranteeing lifetime fixed dollars to the pensioner the DB plan was also adopted to help finance government programs (or corporate operations in the private sector) with the "excess" earnings. I trust we all agree that this is a given." I'll probably regret this, but here goes: Absolutely not. Your statement quoted above is not a "given", and completely ignores the very nature of a common trust fund and the nature of investment returns. You have accused the state of using "excess" earnings to finance other projects. Pretty strong words. Do you have evidence to back it up? Are you accusing the state of a breach of fiduciary duty? intentionally misleading taxpayers? fraud? Is the money invested in a trust? If so, how would the state be using that money? By the way, there is no such thing as "excess" earnings in a trust fund. OK, now to the COLA. If the COLA is 60% of the CPI, then I will estimate that (not having lots of historical data in front of me right now) as an annual increase of between 2% and 5%. Again using general approximations, my estimate is that would increase the plan's cost by about 40-50%. The previous estimate of $410K for the cost of the annuity described would then range from $575K to $615K. Thus, the benefit is substantially more valuable than previously discussed.

Thanks John A for your (long) post. Time out! A 60% COLA! On What? This needs clarification. As a very general rule of thumb, if a DB plan gave a 3% annual COLA, that will increase the plan's cost (and hence the value of the retiree's benefit) by about 50%. In previous discussions, we "valued" the annuity at about $410K (as best I remember). So, if there is a COLA, its value must also be added in. jlf, we need more discussion on the definition of this COLA. Oh, maybe this is it: could it be that the plan gives a COLA of 60% of the CPI? Is it annual or occasional? If so, we can estimate the cost impact of that by answering these questions: 1. Is the COLA part of the plan, or is it ad hoc, awarded at the discretion and timing of the plan sponsor? If the latter, what frequency has it been actually applied? 2. What have been the last actual COLA percents? I prefer to have the last 10, as well as a good definition of how the COLA is determined (and frequency). 3. Any minimum or maximums that apply to the COLA? [This message has been edited by pax (edited 01-24-2000).]

Hold on. There is a fishy smell to this. Keith is corect; it depends a great deal on what the plan says. It also depends on how the benefit formula is defined. I think we need more info to know for sure.

"The regulations do not modify the code, and cannot be relied upon." Can we get that in writing?!

Depends on how you want to define it. The unfreeze is an opportunity to redefine the benefit, especially prospectively, if so desired. Whatever format is chosen, highly recommend that the amendment which unfreezes the plan specifies the answer to your questions. Just be careful of discriminatory issues. W/R/T terminated EEs, same issue, but it seems likely that the plan sponsor would not want to grant a retroactive benefit to such individuals. Could unfreeze by affecting only prospective service.

Agreed. The qouted sentence appears to be a maximum constraint, but it still does not define the match. The latter should be defined separately. Ervin is correct in commenting about the manner of communication.

Not to be too blunt, but what does your plan say? Most plans define the match as a percent of the amount deferred, not as a percent of pay.

Caution with regard to comment by dsilver. There can be circumstances where a legally separated individual is treated as divorced. See Reg. 1.401(a)-20 Q&A 27. But of course, check the provisions of the plan document.

Integration (now called "permitted disparity" in the Internal Revenue Code) is a method of recognizing that the Social Security program does not provide equal benefits as a percent of pay. For example, a worker who earns exactly the social security wage base for his/her entire career will earn a certain SS benefit. But another worker who earns exactly twice this amount will get exactly the same SS benefit, which is obviously much less as a percent of pay. Now imagine that the ER provides a benefit that is exactly 30% of pay to each retiree. The *total* benefit provided by SS plus the employer plan is no longer proportional when viewed as a percent of pay. The tax laws permit a recognition of this by allowing the employer plan to provide a higher percent benefit above a certain level, thus "integrating" with social security. The IRS regs define the method of doing a "safe harbor" integration, such that if the rules are followed, then the plan does not have to prove it is non-discriminatory. Or saying that a different way, the use of SS integration is a method to include a benefit that might otherwise be viewed as discriminatory. The above discussion is a defined benefit approach. The defined contribution approach is that the ER contribution in the form of SS taxes decreases (as a percent of pay) as pay increases beyond the SS wage base. So, by making a higher percentage contribution for pay above that wage base (that is, an employer contribution to an employer plan), the employer is "integrating" the contribution with social security. Again, the purpose is to view the total contribution as a percent of pay. If you have more questions, please post. [This message has been edited by pax (edited 01-14-2000).]

"Partial termination" is terminology that is designed to confuse. That phrase appears only twice in the Infernal (excuse me,Internal) Revenue Code. The only place that is relevant to employee benefit issues is sec. 411(d)(3), where the consequence of such event is to award 100% vesting to "affected participants"

New version of Publication 590 http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p590toc.htm [This message has been edited by pax (edited 01-13-2000).]

No disagreement with Tom. There is one more thing you probably need: some competent advice. You may need some independent review of your plan and/or your entire benefits package. Not to be self-serving, but looking for a good benefits attorney and an experienced *independent* benefits consultant would be a wise move.

I agree with Chester. The FF test could be done at BOY or EOY (theoretically) but only makes sense at EOY because that is the time for determining the 412 and 404 amounts. Also, if you have a new plan (OK stop laughing) with no prior service, then all the BOY numbers are zero, which looks like full funding. By projecting to the end of the year, then you have a valid comparison of assets and liabilities.

My own vague recollection is that the way you recognize an amendment adopted and effective during the current year is part of your method. Thus, if you choose to ignore the 7/1/2000 amendment, that is OK as long as that is the consistent application of how your method recognizes amendments. Alternatively, you can recognize it in some prorated fashion, again with consistent application, obviously taking into account just what the amendment really does that needs to be prorated. W/r/t the 3/1/2001 amendment, I think that you ignore it at 1/1/2000 or 12/31/2000 because it is effective in a later plan year. The exception could (not must) be the recognition of an amendment adopted under a collective bargaining agreement. [This message has been edited by pax (edited 01-12-2000).]

Probably best to reread IRC sec. 4980 with regard to the definition of a qualified replacement plan and the time frame for allocation. Although I do not have the text in front of me, my recollection is that you have (a maximum of) seven years to allocate, or "use up" the amount transferred from the DB plan surplus. The terms of the plan will define how much is allocated and how fast it is used up. Less than seven years is permitted, as long as you don't violate some other provision (such as 415 maximum). Thus, the participants who benefit from this surplus are those who are participating in the DC plan at the time of the allocation(s). BTW, notice Sec. 4980(d)(2)(i) specifies a transfer of 25% of the excess, not AT LEAST 25%. [This message has been edited by pax (edited 01-10-2000).]

Easy to remember: The Unfunded Actuarial Accrued Liability can never be negative. There is no such restriction on the Expected UAAL. If the latter is negative, use it. Note that the above is not simply a part of the definition of the funding method. Rather, it is part of the requirements contained in the regs under IRC Sec. 412. [This message has been edited by pax (edited 01-07-2000).]

Hate to be picky, but does the plan have any assistance to offer in this area? For example, if the plan states that no participant will be paid prior to a severance of employment (exception for 70-1/2 of course), AND the EE was rehired before the check was processed, then you may have a good case for saying the participant was not "eligible" for any distribution. I do not expect the plan to specifically address this type of circumstance, but it would not hurt to review such provisions. Also, check to see if there is a precedent.

One other question: Is the plan top-heavy, or might it be? Failure to make such contributions may be an entirely different problem.

What does the plan say? Many plans prohibit any payment until the employment relationship has severed for some reason (quit, retire, death, disability, etc.) Exception of course for the 70-1/2 rules. Other plans may permit distributions at normal retirement age even if EE has not severed employment. Top-heavy status is not relevant to this issue.

Maybe nothing. A PS plan usually bases contributions on the existence (in some form) of profits. If the plan sponsor has not been profitable, then the lack of a contribution may not be surprising. I think we need more info in order to respond to your question. For example, what is the nature of the Er contribution as defined in the plan?

Amen to that, Dave. That is how I think of the Message Boards. Obviously, you may need extremely fast response sometimes, and that is an example of when the phone works very well. Not really different from me walking down the hall and asking a question of a colleague.

Ouch again. You may have to make the contribution and not be able to deduct all of it.