Andy the Actuary

Yes, and will that guidance come in time for us to redo 1/1/2008 valuations so we can apply smoothing for 2009 valuations to certify the 2009 AFTAP by March 31? If we don't redo 1/1/2008, do we then have a change in funding method for which there is no automatic approval?

WRERA provided for asset smoothing using an assumed rate of interest not to exceed the third segment rate. It's unclear what this means for years prior to the valuation date -- do you use this years 3rd segment rate or the applicable rate each year. If the latter, what do you use for years prior to 2008 when there weren't segment rates? 2009 contributions for 2008 would be discounted back to 1/1/2008 (not 1/1/2009) using the 2008 effective interest rate. If excess contributions that will be recognized in the prefuning balance, they are then brought forward to 1/1/2009 using the 2008 effective interest rate.

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Let's suppose max lump sum at 62 prevails for sake of argument. I calculate a factor of 145.47 Then, we have the following maximum TNC. 1541.67 x 145.47 divided by 35: 1.0643^27 = 41,690 40: 1.0643^22 = 56,932 45: 1.0592^17 = 84,361 50: 1.0592^12 = 112,468 55: 1.0592^7 = 149,941 I have changed these thanks to Jay (the 21 year old) who pointed out my numeratic senility. They agree with Flosfur's. The point being the other information doesn't enter into play.

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Does the IRS contend the restrictions apply to a one-person, one-participant plan? So, not-frozen one-person employer becomes permanently and totally disabled and must cease working. Plan is less than 60% funded. Can't pay lump sum; can't even purchase an annuity. Cannot terminate plan. So, about the best you can do is start periodic payments but disabled person must continue to pay actuary in perpetuity? But, the one-person is not disabled and wants to contribute about $150K annually. How do we advise this person. Contribute the money at your own risk as you may not be able to get it out of the plan if you need it? Your comment suggests the IRS will wink at the one-person plan situation where whatever assets exist would be distributed in a lump sum. But, what if they won't? When did we fall victim to the death of common sense?

The answer is almost "yes" provided no participant elects an annuity and all benefits are distributed in a lump sum. Provide the election packages with lots of up front time and request (do not demand) that they are returned by January 31 . There is also nothing wrong with requesting those who are interested in an annuity option to at least so indicate early with the understanding it takes time to purchase the annuity. Err on the safe side when providing lump sum estimates and guess low. No participant will complain if you give him/her more than illustrated but the phones will ring off the hook if you pay less. The final comment is the client may want to determine when it will offer distribution based upon the interest rate trend. This assumes the interest rate stability period is the calendar year or at worst the calendar quarter. Assuming a calendar year plan, there are also the cost savings of not opening up another plan year.

Would like to revisit where the Plan has an owner employee and two staff nonowners and further the Plan was frozen 12/31/2007 and underfunded (about 60%). There is no TNC. There is only an amortization. (Notwithstanding opinioins on whether or not distribution could be made upon termination) I would argue that if the Plan temrinated, the staff would get their full benefit and the owner employee would take the hit. Thus, the entire contribution would be deducted on 1040 and there would be no allocation to Schedule C. This position would not necessarily be in the best interests of the owner employee owing to selfemployment tax on any portion that would otherwise be allocated to the employees. Of course, in this situation if we allocated the gains/losses (say based upon FT) most would go on 1040 owing to the relative size of the FTs! Any thoughts?

This is under 8/31/2007 funding rules: If the FTAP for a plan year, determined without regard to the section 430(f)(4) subtraction of the funding standard carryover balance and the prefunding balance from the value of plan assets, would be 100 percent or more, then, for purposes of section 436 (but not section 430(d)), the value of net plan assets used in the determination of the FTAP and the AFTAP is determined without regard to any subtraction of funding balances under section 430(f)(4). The proposed regulations would reflect the transition rule of section 436(j)(3)(B) under which a plan is permitted to phase up to 100 percent for purposes of the preceding sentence. Does this accomplish it?

The client is effectively making contributions greater than the minimum required and adding to the credit balance. Then, as available, the client would apply the credit balance in a future year to reduce the minimum. Now, deductibility is another issue.

For funding, IRC 436, contribution sounds as if it would be an excess contribution that the employer could elect to add to the prefunding balance for 2009 in accordance with the fules. Then, the employer could apply this PFB for 2009 provided FTAP for 2008 >=80%. It is worth an edit to note that the election to add to the 2009 PFB must be made by the filing due date, including extensions, for filing the 2008 5500. The election to apply the 2009 PFB to reduce the 2009 contribution, however, must be made by the end of the 2009 Plan Year, and not the filing due date of the 2009 5500. Someone please comment if you disagree with this note.

The PBGC advised now that this will not be a slam dunk and that they will consider this a premature termination and submit this case for audit. So, question is should we forego filing a pro-forma 500 and 501 which essentially accentuates their position and simply stick to our guns that we relied upon information published on the PBGC's website that all we needed to do was notify the PBGC that coverage ended?

How does the plan define Compensation?

Looks like no minimum contribution for 2008-09, which was the case prior to WRERA because PPA provided that the phase-in applied for determining whether or not a short-fall base was to be established and also that for this purpose, the FSCOB was not subtracted from the assets. You may find the following crib helpful but be sure to assure yourself that it is right. funding_Rules.doc

I am dense and apologize. This upside down hanging is starting to get to me.

Thank you all. My reading of the frozen plan rules is that after 12/31/2001, no further service is granted for top-heavy purposes. And, the determination of average compensation disregards these years as well. Ergo, not TH benefits. I will buy coding error.

An actuarial report prepared using the Datair system shows a TNC for a DB plan that has been frozen since the 1990s. Why would this be? Would they be measuring the actuarial increase to late retirees as a change in accrued benefits? This would make some sense, though the assumption page does not indicate there is a retirement delay for those actives over the normal retirement age on the valuation date. I.e., the assumption would be they retire immediately.

I will take this advice. But, first please provide your name and address as my client will be looking for a new EA. Seriously, I agree with what you advocate. There was an actuary in town who simply made up numbers, was ultimately disenrolled, but kept signing Schedule B's nonetheless. I refused to take over any cases that he had worked on because it meant going back to day one and redoing all the work. The only way this is palatable to the client would be if it is demanded by the IRS. In the past, on a takeover it was incumbent upon the new actuary to replicate the preceding actuaries valuation within a 5% tolerance or it was deemed a change in cost method. With PPA, how can there be a change in cost method when PPA prescribes the cost method?

From Sungard Relius software: Line 21b. ERISA section 303(h)(2)(E) and Code section 430(h)(2)(E) provide that the segment rate(s) used to measure the funding target are those published by Treasury for the month that includes the valuation date (based on the average of the monthly corporate bond yield curves for the 24-month period ending with the month preceding that month). Alternatively, at the election of the plan sponsor, the segment rate(s) used to measure the funding target may be those published by Treasury for any of the four months that precede the month that includes the valuation date. Enter the applicable month to indicate which segment rates were used to determine the funding target. Enter "0" if the rates used to determine the funding target were published for the month that includes the valuation date. Enter "1" if the rates were published for the month immediately preceding the month that includes the valuation date, "2" for the second preceding month, and "3" or "4," respectively, for the third or fourth preceding months. For example, if the valuation date is January 1 and the funding target was determined based on rates published for November, enter "2."

WRERA applies as if part of PPA. So, the following question arises. Actuary "A" performs the 2008 actuarial valuation and AFTAP certifications of a January 1, 2008 valuation for a calendar year plan as 90% and got all this done by March 31. Actuary "A" couldn't not take it any more and retired suddenly but is still around to bridge transition and clean up loose ends. Actuary "B" was retained going forward. The issue is why should the client have to pay to redo 2008 valuation [though most of the heavy lifting (e.g., determination of Funding Target) has been done? The result of redooing the valuation is that the employer will have made excess contributions since the redoo will reduce the 2008 minimum. So, why not let the sleeping dogs lie, have the employer elect not to redo the valuation [the election feels good but there is no legal basis], let Actuary "A" just sign the 2008 SB, and then Actuary "B" recognizes the 92% funding target when he/she determines the 2008 amortization charge and remaining base in 2009? How should Actuary "B" proceed? Please vote.

On 12/23/08, President Bush signed into law Worker, Retiree, and Emplooyer Recovery Act of 2008. This act allows for some asset smoothing with a 110% corridor. How to calculate the smooth value is not exactly clear. WRERA is retroactive to the first plan year beginning in 2008 and am unsure what this means. For example, many have completed the 2008 actuarial valuation and produced certifications using market value. Can these be modified? Can you just start using smoothed value in 2009 without a change in funding method? If you are not talking about this, then as a good consultant I just gave you a lot of information you already knew and didn't ask for and I apologize for this. However, apart from WRERA I am unaware that Congress is paying any further attention to DB plans.

You've painted us all In living color. Some of us badder, the others sweller. But as we shuffle and wordsmith up a sweat, You'll stay dry as sure as you bet: 'Cuz you're the Benefits Link poet L-L-Laureate. Bravo!

Did the IRS articulate their position of why it was discriminatory? I.e., what code sections did it violate and why?

Where did the IRS indicate it backed off? Informally? Unfortunately, ACOPA is not a federal governing body and hence their interpretation of the proposed reg. (no matter how reasonable) has no teeth.

We may need a lifeline to weigh in on this as I'm not sure I'm ready to say "final answer." But the way I read this is for funding purposes, its business as usual and accruals keep a comin'. For purposes of paying benefits, its a different story. The Plan has to so provide if it wants to automatically restore the accruals. (I'm guessing this will be an option in prototype plan documents. When the investment broker completes the adoption agreement, he will sometimes check "yes" and sometimes check "no" depending upon the price of pomegranites in the markets in Bombay.) If accruals are not automatically provided, then the plan would have to be amended to provide, and if not so amended, then how in the name of Beulah the Witch you would calculate benefits (e.g., to avoid double proration) is beyond me. Here is the lovely story from 1.436-1(a)(4)(ii) of the Aug '06 proposed reg.: "Similarly, a plan is permitted to be amended to provide that any benefit accruals that were limited under the rules of section 436(e) will be [automatically] credited under the plan once the limitation no longer applies, . . ." As a final note, it would make absolutely no sense to continue to layer on accruals for funding purposes but not restore them once the AFTAP became 60%.