david rigby

this is an admin. boo-boo. Seems perfectly reasonable to fix it so that the NHCE is not harmed. First order is to determine what should have happened, then to determine how much is required to fix it. As near as I can tell, the overpaid HCE has all of the money that belongs to the NHCE, but someone else might be at least partially at fault for the administrative problem. If the HCE is even partially responsible, then that EE has very little standing to say his IRA won't pay, in my opinion (actuary/consultant, not attorney). I don't think the identity of the IRA custodian is relevant. If the HCE resists (likely), it is worth noting that he received too much. That is a status that should be corrected as well as the other EE's underpayment, esp. since the amount is clearly not trivial. If he got too much, then his rollover may be disqualified. Seems to me that corrected 1099's are appropriate, perhaps even mandatory, certainly advisable to document and too prove that no one is trying to hide anything. Good luck. Let us know what happens.

HD, Some basics may help you. A DB plan defines an "accrued benefit" at any point in time using some formula, usually taking into account the employee's compensation (or some average thereof) and service. Note that compensation and service are each defined in the Plan so don't just assume; for example, service might be defined as a plan year in which the EE works at least 1000 hours; compensation may be defined as all comp or may omit overtime, bonuses, etc. Read the documentation carefully. (That is, start with the definitions.) Now that the accrued benefit is defined, note that it is usually payable at Normal Retirement Date (also defined), which is very often age 65. For ex. an EE age 50 with 20 years of service may have an accrued benefit of $500 per month, but the plan will not commence that $500 until age 65. Then the plan may permit a reduced benefit to commence earlier, usually some percentage of the $500. The reduction is to account for (approx.) the longer time period that the benefit will be paid. Remember that a DB accrued benefit is usually an amount that is paid for the life of the retiree; one of the attractions of a DB benefit is that the EE cannot outlive the money, which is not the case in a DC plan. Hope this background is not too verbose for you. If you have more questions, just post.

There is some similaity to the situation where ER terminates a DB plan (or merely freezes it) and all future benefits are earned in a DC plan. The younger EEs probably like this because they have more years to take advantage of compounding (in addition to the concept of the individual account), but older EEs get very little value from only a few years of compounding. In fact, the above situation is probably better for older EEs because they get something, but in a cash balance conversion, they may get no additional accrual. The comment by MWyatt above is correct: cash balance plan is a career average plan. From ER perspective, it may be more manageable / predicatable cost than a traditional DB plan based on Final Average Comp. But the cash balance plan has less flexibility: harder to deal with early retirement subsidies or windows. Also, it usually gives a larger death benefit than a traditional DB plan. [This message has been edited by pax (edited 12-31-98).]

Lorraine is correct. There are brief mentions of IRC 404(a)(1)(A)(ii) in a few places: 1,404(a)-14(f) 1.404A-2 Announcement 98-1 Rev. Rul. 94-75 Rev. Rul. 82-125 Rev. Rul. 80-267 These cites don't really say any more than the IRC language. A logical interpretation of this is that a plain reading of the statute is your only real guidance.

this is a great question. My gut feel is the opposite, howver. That is, when you buy an annuity, it is supposed to provide all of the features of the qualified plan., such as the same J&S factors, same ER reduction factors, etc. My guess is that the annuity would be required to do the same for the EE contributions. Another possiblity might be to determine the ER portion at plan termination, refund the EE amounts, and purchase the annuity for the ER portion. Don't know if this is permitted. Even if so, it would likely require EE (and spouse) signoff to distribute a portion of the benefit. Good luck.

Not sure if this would help, but consider if the plan could invest in the land along with others (other plans or other investors) so that the portion of the plan's assets that are tied up in real estate is minimal. that's the diiversification issue mentioned above.

go to Governmental Plans message board and ask this question

the above comments seem to focus on the numbers. but there is another part of the equation: demographics. the ratio of workers to recipients today is about 4 to 1 (I think). That ratio will be cut in half in the next 30 years. Part of the reason is the large cohort of people (called the Baby Boom) that is aging into retirement. the other issue is the governmental activism that has (falsely, in my opinion) encouraged low birth rates. why have they encouraged this? so that more married couples can be two income families, generating more tax revenue for the politicians and bureaucrats to spend. OK, I'll get down off my soapbox now. I believe that major surgery on the SS system will be a failure, because of the time it takes to see the problem and the success of any solution. those who call for investment of monies in the equity market are just looking back over the last 15 years with regret, relaizing that we should have done it sooner. Perhaps so, but the large volume of dolllars will sway any market, whether it is stocks, bonds, or t-bills. Remember that about 2025, SS will be paying enormous amounts each month. These amounts are cash, so that no matter what the investments are in, they must be sold to generate cash. that will cause that investment market to have more sellers than buyers and prices will go down. My suggestion is to raise the SS retirement age, probably to 70, gradually. In addition, some of the funds should be invested in other securities, but not a significant portion. [This message has been edited by pax (edited 12-17-98).]

What do you mean? You do not treat the 1994 accruals as a "new employee" in terms of participation, vesting, etc. I'm not really sure what you are asking. If, for example, you are referring to a service maximum, then the "second part" of calculation will normally recognize any service included in the "first part", but the addtional benefit accrual beginning in 1994 can be any formula you want (generally). If the frozen part included SS integration, then there is still a max of 35 years (total) for use of 401(l) safe harbor definitions.

Need more info. My experience is that 100% of DB plans offer a lump sum, although most of these are the involuntary cashout rule (now $5000). Also, the prevalence of lump sums of larger amounts (perhaps even without limit) is guided by many factors, such as nature of the industry (for example, I have seen many hospital plans with lump sum limits of $7000 to $10,000). The single most significant factor is the desire of the owner. Is the DB plan sponsored by a sole owner, or possibly a family business? If so, much higher likelihood that the plan will include an unlimited lump sum option. Another factor might be the nature of the workforce; for example, a plan covering primarily attorneys or achitects. Another factor is the management / owner philosphy and level of paternalism. If management is concerned that a blue collar workforce may squander lump sums, then the lump sum limit will be set low.

Gary, The SOA publishes an very valuable resource entitled "Statistics for Employee Benefit Actuaries". It is issued in April of each year. I use the book every day (literally). For example, Table 1A has 30-year Treasury values and PBGC rates beginning with January 1978. Many of the items in the book (perhaps all) are included on the SOA website (in Zip files). Enjoy!

Ed, I am not familiar with that situation, but i do have 2 cents to contribute. I am an actuary, for background. It is my opinion that the enforcement of "reasonable" definitions of actuarial assumptions is ultimately up to the "pension community", consisting primarily (in my opinion) of plan sponsors and consultants. It would be a very long and difficult stretch to this commenter to include 3% or 4% in that definition. But, to be fair, you did not specify what the purpose of the rate is: funding, actuarial equivalence, etc. although the answer to that question will probably not matter. Comments anyone?

forms not yet mailed. BTW, i was told/read recently that if you don't have your required credits by 12/31/98 but you do have them by the time you send in your renewal form, that is OK. Can anyone confirm?

I have a DB plan sponsored by a governmental unit (a hospital owned by a county). The plan is safe harbor, uses a volume submitter document, and is pretty much vanilla. The sposor adopted the GATT provisions (mortality table and interest rate) for determining lump sums 3 years ago. Two years ago, the plan was frozen, in anticipation of terminating when they have enough money. They don't have enough; with the recent decline in 30-year treasury rates, the underfunding has gotten worse. Can the plan be amended to change the actuarial equivalent definition (currently GATT basis) to something less expensive (such as an interest rate of 7.5%) ? Currently, the plan contains fairly common language stating that "an amendment shall not not reduce the vested benefit of a participant determined as of the later of the adoption date or the amendment's effective date." (Note that that sentence does not refer to the defined term "Accrued Benefit".)

The Society of Actuaries has issued the table. Actually there were 2 tables issued in 1995, published in the SOA Transactions. The GAR-94 Table (Group Annuity Reserving Table) was proposed to be used as a reserving standard for insurance company reserves. It includes a 7% margin in the mortality rates at most ages and includes projection using a generational approach. The UP-94 Table (Uninsured Pensioner 1994 Table) is based on the same data as the GAR-94 table, but does not include the margin. There are multiple methods proposed for projection purposes. We have seen some movement toward using the UP-94 Table (note that it is not unisex) in actuarial valuations, but most of that has been situations where the plan is already well-funded so that the increase in measured liability does not hurt the funding. This table, or some modification of it, is being studied by the IRS for possible use as a replacement of the 1983 table for various purposes.

I agree with Lorraine. We have seen several plan sponsors decide to rescind the termination, with a simple resolution. As stated, there does not appear to be a way to rescind the 100% vesting. I would not just ignore the process; a positive step to rescind is better than an implicit one. I don't think that the reason for rescinding is relevant. This is the perfect example of why a termination should state 2 things: freeze and terminate, so that if you change your mind about the latter, you will not affect the former.

by the way Dook, your first comment about Executive Life does not hold water as a criticism of DB plans. That problem was an investment choice (by plan sponsors), which could also have been made by individuals in a DB plan or an IRA. One of the major problems is that many observers (including members of Congress) think narrowly, and construct laws and regulations that favor DC plans, thus effectively removing (or minimizing) choice by sponsors and participants.

Most of the above are pretty good. My list is pretty short: Modify the non-deductible contribution limit, so that sponsors can make contributions when times are good, to pre-fund the down times in their business cycles. Eliminate the PBGC entirely. This well-intentioned agency does not serve its mandate (to promote the private pension system) but does discourage (that is, by its mandated "premiums") the very existence of DB plans. I propose an alternative: each plan contribute $10 per participant to the trust (after all, the trust is the only place it can do any good for the participants) annually. Last, I suggest that, if DB plans are subject to spousal oversight, then DC plans must be also.

Why not? Seems to me that it always makes sense to review. In this business, I call that customer service. If this former EE is a vested term entitled to a future benefit, there should be some records available to let the plan sponsor know what has been earned and what has been promised. Has the EE already been informed of his benefit and rights under ERISA? If so, use that as the starting point.

You can reasonably modify your actuarial assumptions to those required for payment of lump sums under the plan's definition of actuarial equivalent. This is especially justifiable if the plan termination is soon. Even if not, it may be reasonable to make such modification, or something close to it, now. Another thing to do is to review the data, to see if there is any missing items, such as multiple periods of employment for any EE. This is usually important in any plan termination, so you may as well get started now. It may help you further refine exactly what your liability is.

not that I know of. The minimum funding standard is a snapshot. You have 8-1/2 months after the end of the plan year to make the IRC 412 contribution. If you don't make it, you don't make it. The only "grace" I have come across was as follows: Client had financial trouble and could not make the final contribution, but did not tell me (actuary) until last minute, Between September 15 (due date) and October 15 (filing of the 5500 and Schedule b), I reviewed all aspects of the 412 amount, including actuarial assumptions and application of the transition rule for DRC and found that I had some room to "play" thus lowering the actual 412 contribution and the resulting excise tax for failure to pay. Frankly, I lucked out, because the assets did well and by the first of the next year, the plan funding had caught up to liability. Those kind of "actuarial gymnastics", while legal, still bother me. But we can't all have perfect clients.

I think there is another issue: why was the lump sum underpaid? If it was because of a clerical error or a data correction, I suggest recalculating based on the correction and bring the difference forward with interest. If the underpayment was due to some other reason, such as a retroactive plan amendment, perhaps the answer is not as clear. However, my practice would be to use the same process of recalculate the benefit at the original date.

More comments: 1. We have a fair number of govt. plans, mostly Hospitals owned by the county. 5-year vesting is the most common. there are a few that use 10-year, 10-year graded, or 7-year cliff vesting. 2. I have one govt. plan that improved its benefit formula a few years ago. the only way they could sell the increased cost to the managment board was to implement EE contributions on a pre-tax basis. The plan does allow a vested terminated EE to receive a refund of EE contributions but it carries a big penalty: permanent forfeiture of all ER provided benefit.

Sorry I was not more specific. With respect to Ralph's comment, the university is not a public one. With respect to Carol's comment, the plan is not being altered (except to recognize future compensation with the university). Rather, the employees will no longer be employed by the county so their accrual service will automatically be frozen. Carol, does this take care of the problem in your point (3)?

Govt. ER (a unit of a county government) sponsors a traditional DB plan. County is "selliing" the function to a non-profit organization (a university). The county will retain the plan. EEs will be employed by a division of the non-profit. EEs will cease benefit service accruals but will get the benefit of future salary increases while employed with this division (but not if they transfer to any other division of the non-profit). EEs will continue to earn service for vesting and eligibility under the same rules, while employed by that division. 1. Is this going to be a termination of employment? If so, EEs may be able to continue working and receive a benefit. This is especially a problem due to a very generous early retirement provision. EEs are already talking about it. If so, is there any way to avoid this problem? I don't think that we can amend the definition of "Employer" to include the non-profit because that would "muck up" the "governmental" status of the plan. 2. Since this is plan is not subject to IRC 411, there should be no problem with a "partial termination". Is that correct? 3. What else am I forgetting? Thanks.