Andy the Actuary

The IRS Final 436 regs. warn in effect that the IRS is unhappy with plan sponsors who in the IRS eyes are failing to obtain certifications to deny distribution of lump sum benefits. They cite referance to 1.411(d)-4, Q&A-6(b) which basically says funding is within the control of the employer so this may not be used to deny 411(d)(6) protected benefits. I would take this to mean that the restrictions on HCEs a la 404(a)(4) are permitted so long as the plan specifies the criteria. Of course, with all the dilly dalling which now allows at-will changing of interest rates and asset valuation methods, the employer may elect to make changes or not elect to make changes that would alter the plan's funded % to above or below 110%, or above or below 80% for that matter. The issue is PPA is pretty clear about 436 restrictions and the IRS is attempting to work around it. This will be interesting because to my knowledge there is no legal requirement that an actuarial valuation (say of a calendar year plan) must be performed before October 1 so that it's feasible that the AFTAP cannot be certified by October 1 because the work hasn't been completed. This could arise unintentionally say if the actuary of record has departed before completing the actuarial valuation and/or issuing the certification and is not replaced by October 1.

They opened up a new pizza joint named PI in goatpeterville where I reside. It's logo on the door is the pi symbol. The server described the "pie" of the day. She reacted with a blank stare when I asked, "how many decimals in the pie of the day?" (arggh?)

Let's see: Actuary reported if you adopt asset smoothing and change interest assumptions, you can get to 80%. Assume the actuary then requested employer to make elections to so adopt and further actuary did not certify AFTAP until requested. So long as creative changes do not include absurd assumptions like everyone dies unmarried prior to age 65, what kind of actuarial malpractice has the actuary engaged in? In short, the decisions weren't yours. That said, "who can sue whom and for what" is not an actuarial question.

This is a little grey. If the Plan were making distributions to all participants at this time and the Plan was sufficient, then there would be no need for restirctions. However, if the Plan was in a limbo period (e.g., waiting for IRS approval) and the Plan was not sufficient (even though the Plan Sponsor indicated they would make it sufficient), my gut is that the restrictions should apply. This allows for the possibility that the termination could be rescinded say because the Plan sponsor could not come up with the contributions to make the Plan sufficient. Even though 401(a)(4) regs. provide for "pre-termination" restrictions, operationally the conditions apply until actual distributions are made. If the Plan covers only HCEs, there is no discrimination. However, there may be other legal issues of having given preference to certain HCEs if the Plan is not sufficient at time of distribution to other participants. In short, the client would do well to obtain a legal optinion.

Agree.

If DB Plan is not subject to PBGC coverage, wouldn't IRC 404(a)(7) apply so that SEP IRA contribution would be limited to 6% of compensation?

The new 404 employs a definition of FFL under a new 431, which appears to apply only to multi-employer plans.

Wouldn't 404 assets still be reduced to reflect contributions made but not deducted? If you don't do this, such contributions might never become deductible. Also, question of how to treat accrued contributions -- i.e., whether or not these should be discounted. Perhaps, these questions are addressed elsewhere.

Well, now as Mr. R suggested, you're into negotiations. You're the PBGC's best shot at getting this plan disposed of. Again, it is not incumbent upon you to work for free.

I'm confused on the facts. I thought you (AndyH) were going to take over this plan from another TPA/actuary. Is this correct? If so, there shouldn't be any unpaid invoices. Would you please jot a few lines about the particular circumstances. aTa

I do not recall reading in the golden book of professional ethics that you must work for free or cut your customary rates. In fact, it would make perfrect sense to request and operate on a retainer basis (paid out of the plan assets?). If the PBGC finds your terms unacceptable, they are free to retain another actuary. This position makes sense in particular since you implied by "takeover" that you have not had any involvement with this client and plan. It became very clear to me in my early days of entrepreneurship that if I were willing to work for free I could get a lot of business.

A DB plan provides a normal retirement benefit at age 65 of 70% of average compensation up to maximum covered compensation and 22.75% of average compensation in excess of maximum covered compensation for participants with 35 years of service. Thus, it provides integration in accordance with the simplified Table IV under IRC 1.401(l)-3(e). I.e., the maximum permitted dispairity is .65%. Now, suppose the benefit commences at age 70. Then, the plan says to actuarially increase the age 65 benefit. Suppose the actuarial increase factor is 1.7. Then, we have 1.7 x .65 = 1.105. But, the maximum permitted dispairity at age 70 under Table IV is 1.048. In short, even though the Plan says actuarially increase it appears that Table IV would limit. Any comments?

Have you considered jumping headfirst into a vat of V-8?

Excellent and fair policy.

What does the plan say? Normally, the plan specifies and actuarial equivalance basis for non-lump sums.

Yup, assuming the PBGC guarantee crud is not applicable.

I went through this issue with a benefits attorney regarding accumulated monthly payments pertaining to a retroactive annuity start date. The conclusion was that these would be subject to the 436 restrictions.

Your conclusion about fully funded while it sounds logical may not be the case. Deductibility laws permit deducting additional amounts. Apart from contributions exceeding any statutory limits, which is what J4FKBC was getting at, the bigger picture is how close is the Plan to providing maximum statutory benefits upon Plan termination? The laws severely penalize plan sponsors if their plan terminates with assets in excess of the maximum permissible amount (which is not an easy or static calculation).

Grebny-Hogan award for best comment of 2009.

Apparently -- and this is from the 2009 EA meeting (see an earlier thread) -- a plan sponsor can no longer deduct a contribution for a prior year if it is not claimed on the prior year SB. For example, a contribution made in 2009 and deducted in 2008 must be claimed on the 2008 SB and cannot be claimed on the 2009 SB.

But, when using the hours equivalency within the Plan, a break-in-service in unilaterally defined as 500 hours, so I wonder about the inconsistentcy. The normal break in service is 501 hours -- about 1/4 of a year. Using your suggestion, 1/4 x (190 x 12) = 570 hours or 3 months. Thus, for example, using the equivalency and a calendar year, we would under the proposed determine an employee as excludable if he terminated before April 1. Without the adjustment, he would have to terminate before March 1 to avoid being credited with more than 500 hours. I was planning to use the April 1 cutoff anyway as it is reasonably consistent with the note under (f)(v) regarding the elapsed time method. Thanks for your help.

A plan uses the 190 hours/month equivalency for crediting service. The 410(b) regs. prescribe the circumstance whereby certain terminating employees may be treated as excludable, one of which is the employee must not be credited with more than 500 hours of service during the year. 1.410(b)-6(f)(2) indicates "If one of the equivalencies . . . is used for crediting service under the Plan, the 500-hour requirement must be adjusted accordingly." Can anyone shed light on what "adjusted accordingly" means?

SCA's suggestion is a good compromise, especially for Plans subject to PBGC notification, where you don't even want a chance your client will miss notifying the PBGC of missed quarterlies. For plans not subject to PBGC notification, quarterlies are not a problem. One way to deal with them for clients who are not concerned about paying the bare bones minimum and where there is 404 room is simply to determine the minimum required contribution [without getting upset over the nomenclature] as if it were all being paid 8 1/2 months after the close of the plan year. If paid sooner, than fine.

Thank you for correcting my (a) sloppyness (b) slopiness © slop. I have edited the post to reflect your corrections.

Five diapers?