Andy the Actuary

A Plan was frozen in 2006. The 2008 AFTAP was 80%. The EA has taken the position that he will issue no AFTAP certification until the employer requests. The employer makes no such request (ever!). As of 4/1/2009, the plan is presumed to be 70% funded and the AFTAP is deemed to be 70%. Employees are notified by 4/30/2009 that lump sums are restricted to 50% as of 4/1/2009. As of 10/1/2009, the plan is deemed to be less than 60% funded since no AFTAP certification has been issued. Employees are notified by 10/31/20090 that lump sums are not available. Thereafter, employees are notified by April 30 that the lump sum option is not available. The employer has effectively eliminated lump sums without violating 411(d)(6) even when the plan's actual AFTAP may be greater than 80%. Apart from employee relations problems, does anyone see any legal problems in this process?

Wrong -- the alternate payee gets freedom from the participant!

I had searched but didn't find any -- likely a problem with my keyboarding!

Thank you. This is a very strange and convoluted result.

A DB plan is not subject to the 436 restrictions but is restricted from distributing lump sums to HCEs. We have the following for a participant who was age 60 in 2006: Compensation 2006: 200,000 2007: 165,000 2008: 90,000 Employee terminates 1/1/2009. Employee is NHCE in 2009 so may have benefit distributed in a lump sum. However, if employee defers election (to say 2010) and 401(a)(4) HCE restrictions still apply, employee becomes Former HCE in 2010 and therefore cannot have benefit distributed in a lump sum. Any disagreement?

This is not a definitive answer but if the divorced spouse were not subject to the restrictions, a lovely couple could subterfuge around the restrictions simply by getting a divorce and assigning 100% to the alternate payee (e.g., the participant's loving ex-spouse). This, of course, is hardly worth the trouble unless the lump sum were say about $2 million.

Obviously, with little and conflicting direction, zero court cases, two-actuary-three-opinion conclusions, each of us has to proceed in a way we believe the law requires and what fits the practicality of the situation. The postion was simply the concensus at the EA meeting and not a gold standard. Your position makes sense. We are in a damned if you do, damned if you don't position. To eliminate the "who's the client" question, the EA position simply says, "don't blame me."

Recommendation is that you do not certify AFTAP until client requests. Following this procedure ostensibly will absolve you of any fiduciary responsibility. This is the song that was sung at the EA meeting. My good buddy, good pal, former colleague at Towers Perrin indicated that was the procedure they are following.

In their March 31 missive, the IRS indicated that for 2009 can switch character and timing of interest rates. All discussions have been in respect of improving AFTAPS. Any issues if the Plan Administrator elects the interest rate character and timing the produces the worst result. For example, if the AFTAP would be at 63%, it might be possible to reevaluate and determine an AFTAP of less than 60%. So, rather than restricting lump sums to 50%, lump sums could not be distributed, except for deminimis amounts. The particular client would just as soon not sell off depreciated investments.

To change subjects, if a plan sponsor will post their 5500 on the intranet, the AFN should so state and provide the URL. However, the AFN must be distributed by April 30 (for non-petite plans), the 5500 may not be filed until October 15. So, employers have lots of choices: (1) Post whenever available but say nothing in AFN. (2) Post whenever available and simply provide location information in AFN. (3) Modify wording in AFN that 5500 will be posted as soon as filed which could be as late as October 15. (4) Do not post 5500. I guess (3) are (4) are the practical alternatives.

Those who grew up on the Adventures of Ozzie and Harriet will easily conclude that Ozzie was the Everyman of this millennieum -- He had no visible means of support but lived the American Dream.

What a frustrated old actuary does when he's not certifying AFTAPs What_Good_Is_Probability..pdf

At the EA meeting on the subject, they also said "no."

It also states that language as stated in Appendix C of the FAB should be included which includes the Funded Current Liability percentage for the pre-PPA years. Indeed it does, but that language in "C" means -- at least to me -- that you don't subtract the FSA CB.

Q-16 of Field Assistance Bulletin No. 2009-01 indicates to insert "not applicable" in the cells of FTAP chart that do not pertain. Thus, for example, since prior to 2008 there was no such concept as FSCOB, the instructions imply to enter "not applicable" under 2.b for 2007 and 2006.

At the 2009 EA meeting, Jim Holland was clear that no IRS guidance was contemplated regarding the distribution of the restricted portion. As Mr. Effen indicated, "document issue." It may be possible to set up an option for the participant to elect an annual distribution until a restriction no longer applies and then the remainder is paid.

Ohhhhhhh. It's fess up time. I missed your assumption that the 2008 AFTAP is > 100%. The presumption effective 4/1/2009 is 90% and there are no restrictions on distributing lump sums to NHCES until the earlier of 10/1/2009 or the date an AFTAP of less than 80% is issued. So, if your facts are correct, the PA should instruct the EA not to issue the 2009 AFTAP until the PA advises. Second, assuming the Plan wants to distribute unrestricted lump sums as long as possible, the PA should instruct the EA to issue the certification as of 9/30/2009. Under these circumstances, there is no problem. In any event, you can't advise the PA to disqualify the Plan after a <70% certification has been made just because the PA gave out erroneous information. Then, about the only option that ensures the avoidance of attornies and bad press is for the Plan Sponsor to make additional contributions to get the AFTAP to 80% and then the EA can reissue the AFTAP. Not truly knowing the facts and circumstances of your example, if the EA has already issued the AFTAP and it was done without the instruction of the PA, it's possible the PA could demand the EA to retract the AFTAP. I say possible because this is a legal question.

Slight elaboration re: TNC. Now, TNC must include provision for expenses assumed to be paid from the trust which is interesting in itself. In many instances we may have no idea what expenses will be paid by plan sponsor. Now here's the killer (and it wasn't discussed): We know that if we change an assumption that reduces the funding shortfall that IRS approval may be required. Consequently, care should be taken in postulating expense assumptions because TNC could be construed to affect shortfall in subsequent year. What might seem reasonable is "last year's expenses plus PBGC premium." Annual Funding Notice for non-multi-employer plans should be sent to PBGC, ATTN: Single-Employer AFN Coordinator, 1200K Street, NW, Suite 270, Washington, DC 20005-4026 or it can be emailed to "single-employerafn@pbgc.gov." Address for multiemployer plans is same except, ATTN: Multiemployer Data Coordinator, Suite 930, and email address is "multiemployerprogram@pbgc.gov" General concensus is EA should advise Plan Administrator to instruct EA to issue AFTAP certification since this absolves EA of fiduciary responsibility. I.e., if PA never instructs EA, then EA does not certify. Note, additional schedules for Schedule SB include discounted contributions. However, this appears only to be required if missed a late quarterly contribution. Consensus is always provide. Apparently, cannot deduct a contribution for an earlier year than claiming on SB. Example, contribution made in 2009 and claimed on 2009 SB cannot be deducted in 2008. This could arise, for example, if made a 2008 quarterly on 1/15/2009. Then, after revising 2008 valuation for WRERA it is found contribution isn't needed for 2008 so claim towards first quarterly in 2009 (the one due 4/15/2009). You can't deduct for 2008 even though made before 3/15/2009. Contribution made in 2009 and claimed on 2008 SB can be deducted in 2008 or 2009. The IRS will not (at least is not contemplated to) address how plan distributes restricted portion of a lump sum benefit. It is up to Plan design and of course must satisfy J&S, 415, etc. Jim Holland was adamant that amounts burned must be stated in a dollar amount rather than as a percentage or a conditional amount (e.g., enough so that AFTAP is 80%).

Suggest culpable parties seek legal counsel.

Mr. E., I'm acquiescing a lot in my old age! The conclusion was not that this discombobulation wasn't replete with problems but rather that the IRS wasn't going to solve them for us. Here is what I put before an attorney recently as food for thought: (1) Could the Plan include an option that pays 1/2 the lump sum and then an annual amount. When the restriction is removed, the remaining balance is paid. For example, suppose the participant has an annual pension of $24,000 payable at age 62 with resulting lump sum of $300,000 and distributes a lump sum of $150,000. If the special option is elected, the Plan would pay $12,000 (the other $1,000/month) annually until the lump sum has been totally distributed. I.e., we start with a lump sum of $150,000 and distribute $24,000. The balance is increased with interest to year 2 when the restriction still applies. The Plan again distributes $12,000, increases with interest and carries the balance forward to year 3. At such time, no restriction applies, so the remaining amount is released. If the interest rate is 5%, we have: Year Amount Distribution Balance Interest 1 $150,000 $12,000 $138,000 $ 6,900 2 144,900 12,000 132,900 6,645 3 139,545 139,545 0 The difference between this approach and an election of a life only annuity are (1) if the participant dies, the remaining balance is not forfeited and would be distributed to the beneficiary and (2) there will be a finite period after which the total lump sum has been distributed. This approach is similar to how the Plan might administer the lump sum provision for an HCE if the funded percentage was less than 110%. (2) If the Plan cannot offer such option or the employer does not want to amend the Plan to provide such option and a participant elects lump sum payment, at some point the remaining lump sum is paid. What is such amount??? I would say we have two cases: (a) The participant elects full lump sum payment on a "pay me as you can basis." In such case, I would suggest that once the restriction is removed, the Plan pay the remaining 50% increased with interest from the original election date to the final distribution date. (We can discuss the mechanics later.) (b) The participant elects 50% lump sum and defers making an election of the remaining 50%. At the time the restriction is removed, we offer the participant the full array of elections and the chips fall where they may as far as the lump sum calculation. (3) Do you have any feel for whether the first 50% and/or the second 50% are eligible for IRA rollover? (4) Suppose the participant elects 50% lump sum and reaches age 65 and the AFTAP is still less than 80%, then what? The Plan provides the participant must start his pension so the lump sum option goes away and the person is forced into taking a monthly pension?

Sounds as if we have both concluded the same, viz a viz, "?" It appears the mortality assumption may not require an employer election but once postulated may be subject to IRS approval if such change decreases the funding shortfall.

My weary eyes are unable to find a reference that prescribes that the Employer or Plan Administrator must elect whether to use the annuitant/nonannuitant or combined tables. Must there be an election to use the combined table?

http://www.irs.gov/pub/irs-tege/se0309.pdf

At 2009 EA meeting, conclusion from session that involved Mr. Holland echoed Mr. Effen's position that how you handle the distribution of the restricted portion is a plan design issue and that the IRS is not entertaining (which doesn't mean they won't) issuing any guidance.

Yes, actuarial value will be 110% of market value. Also, per March 31 IRS release, can change interest rate month/basis so that might get you over a hump.