david rigby

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.

More. In general, you are correct with your original statement that a DB plan can be used to contribute more than $30K for an individual. And the deductibility should not be a problem. The negative might be (but not necessarily) that the plan sponsor may have to provide more for other EEs than desired. There are some creative ways to deal with this. Much depends on the demographics of the population.

the maximum dollar contribution to all DC plans of one ER is $30K (that is, the limit for each participant). An age-weighted plan merely defines a technique to allocate a total contribution. It does not increase the limit, not does it alter such other issues as top-heavy status.

Interesting. But I'm unclear about why you think this is a problem. We have a few plans that include a SSLI option. Why is it a problem to be subject to 417(e)?

I think you should be very careful here. Many DB plans offer lump sums only in limited cases, such as the familiar $3500/5000 limit. If you have an accrued benefit whose value is clearly over the Plan's limit for cashouts, then any lump sum you give needs to be heavily caveated. We ask the client if there is a need for a lump sum, explaining that the Plan definition may not provide any value and can convey a benefit feature that does not really exist. For example, if your plan uses GATT rates and you did a calc now, you might be using a rate of 5.2%, pretty low. But if that EE were to terminate employment one year later, the rate might be 6% and the lump sum could actually decrease. If you show any lump sum, you probably need some idea of what it is likely to be used for; if a court has requested it, or attorneys for both sides have agreed to the basis, then go ahead, but always describe the census data being used and the actuarial assumptions. We also include a statement that we are not certifying that the lump sum represents the "market value" of the benefit. Another point is that most plans do not allow any payment while an EE is still employed. A statement to that effect is also good.

I'm starting to see the other side. For example, what do you do with the following? two 40 year old EEs with identical comp, each has 5 years of service. The only difference is that Employee A worked from age 30 to 35, and was then rehired at 40; Employee B was hired at 35 and has not severed employment. I think we may have a discrimination problem if our plan treats these two EEs differently. In other words, that may be the primary reason that such plans often have minimum service requirements. Am I just being picky? Any comments?

OK Keith, what is your conclusion? Did you just come down on both sides of the fence? Let me try a specific example: Comp is 10,000. Benefit is 30% of comp, prorated for less than 25 years of service at NRD. The Accrued benefit is that, multiplied by the accrual fraction, which is actual service divided by projected total service. If EE is hired at 35, works 5 years (so vesting is not an issue), the accrued benefit is: .30 x Comp x 5/30 = $500. The EE terminates and is later rehired at age 42. Thus the potential future service at rehire is 23. Does the fraction become 5/28, immediately changing the AB to $535? I contend that this is ridiculous, since it means the EE has received an increase in AB for NOT WORKING. To me, the AB cannot have changed. In fact, I believe that the denominator of the fraction must always be 30. Comments?

i think you have captured my situation. It seems to me ridiculous that someone's accrued benefit could change (up or down) because of partime employment, or a break in employment. I ceratinly would not want to explain to Mr. CEO that situation. I would love to get other responses on this to see if I/we can reach a consensus.

Plan defines service by 1000 hour rule and accrued benefit by fractional rule; no special definitions. Situation: EE hired at (say 25) works full- time for 6 years (total projected service is 40). Terminates employment with more than 500 but less than 1000 hours, is rehired two years later and again works 1000+ each year. when he finally terminates, is the denominator of his fraction still 40? Or is it reduced by the "missing" years in which he did not work (or may have worked a fraction of the year, getting between 500 and 1000 hours)? My point is that the definition of the fraction refers (numerator and denominator) to the defined (and capitalized) term "Years of Service". We have a difference of opinion in our office on this. Some say that because the EE did not work 1000+ hours, it does not meet the definition of "Year of Service" and should be ignored. Others say that this does not make sense because it means that an accrued benefit can increase merely because an EE worked parttime, thus reducing the denominator by one each year. Taken to an extreme, this means that an EE who works several years full time and then changes to partime for the next 30 years will end up with a fraction of 1 at NRD. Any comments? Thanks.

I assume that the freeze amendment did not also give 100% vesting. If it did, no brainer, since you can't undo that by amendment. My judgement is that the two non-family EEs who terminated do constitute a partial termination. but there is still a facts and circumstances issue in this determination. For example, if one of them terminated by dying, then you probably don't have to count that against the 20% test. Look at IRS form 5310 and instructions. There is a question (don't remember the line number but it is the bottom of page 2) that asks for the number of non-vested terminations by year. If over 20%, you are requested to show why it will not constitute a Partial termination. The fact that the son and wife quit (by the way, 4 out of 6 employees quitting is 66.7%, not 60%) should not have any effect on the vesting of the 2 others. If the 2 others are a partial termination (2 out of 6 is 33%) then that by itself will cause 100% vesting.

I assume that the freeze amendment did not also give 100% vesting. If it did, no brainer, since you can't undo that by amendment. My judgement is that the two non-family EEs who terminated do constitute a partial termination. but there is still a facts and circumstances issue in this determination. For example, if one of them terminated by dying, then you probably don't have to count that against the 20% test. Look at IRS form 5310 and instructions. There is a question (don't remember the line number but it is the bottom of page 2) that asks for the number of non-vested terminations by year. If over 20%, you are requested to show why it will not constitute a Partial termination. The fact that the son and wife quit (by the way, 4 out of 6 employees quitting is 66.7%, not 60%) should not have any effect on the vesting of the 2 others. If the 2 others are a partial termination (2 out of 6 is 33%) then that by itself will cause 100% vesting.

Seen it. done it. I think it is still OK. You are correct in stating "incidental".