Andy the Actuary

Just another stirling example of the law of unintended consequences and why Congress would do well to scrap PPA in entirety.

Mr. Effen, don't know if this helps but recently completed PBGC Form 501. The instructions defined nonconsensual lump sums as those the Plan provides may be distributed without participant/spousal consent. I find it interesting that (in 2009), a DB Plan could distribute a monthly payment of $16,250 ($195,000 annually) to someone whose pension is at the 415(b) limit but cannot distribute a lump sum sum of $1,100 to someone whose monthly pension is $9. This is similar to requiring spousal consent on a $5,100 401(k) loan but requiring no spousal consent (or disclosure) for someone to drop his life savings in Vegas.

There's been some tongue-in-cheek in these discussions but this is one nasty and sad issue. In particular, your clients are out a ton and, if I may speak for others, you have our empathy. It's worthwhile to somehow get this issue to the IRS/Congress. Your clients cannot be the only investors that are in a pension pickle and possibly the government would issue some relief so that an impossible situation does not become infinitely worse.

One of the many concerns is suppose they contribute a whopping amount. Then, in accordance with Murphy's law, Bernie becomes the bailout queen du jour in DC, so partial or total restitution is made to the Plan. Now, the Plan could be grossly overfunded and the Plan is terminated with excess assets that may not be distributed to the Participants. Further, little green frogs drop out of the sky in Grovers Mill, NJ, the Cubs win the pennant, and Steve Franken is elected US President. Oh, my, what a bad day.

David, the 2 person plan wouldn't require bonding but even if it did, only 10% or 100,000. By bonding, do you mean the company may have obtained some other umbrella coverage that would indemnify them in the event of malfeasance?

Two actuaries, three opinions! It is incumbent upon the trustee to provide the asset valuation. That said, it is not your decision what assets to use. Client may wish to seek a legal opinion as to the appropriate valuation. I can't see using a value you know de facto is bogus any more than using a fabricated employee census. Here is the EA certification qualifier: "To the best of my knowledge, the information supplied in this schedule . . . is accurrate . . ." Would you sign Schedule SB using a Ponzified asset statement as your basis?

Agreed and it also doesn't specify which month we get the 3rd segment from when it might matter. Is it implied that its the month of the your funding rate assumptions?? Sure, and what segment rate do you use to get from At-2 to Ati1? For example, 2009, 2008, or 2007.

ERISA notice to participants and beneficiariesUnder section 101(j) of ERISA, as amended by PPA ’06, the plan administrator of a single employer plan is required to provide a written notice to participants and beneficiaries within 30 days after . . . the valuation date for the plan year for which the plan’s AFTAP is less than 60 percent . . ." So, if in the end, the AFTAP is less than 60%, notice would have to be provided even though plan benefits are frozen. Further, it appears notices would have to be provided to retirees, beneficiaries, terminated vesteds, and alternate payees as well as to active participants.

(5) Deemed election to reduce funding balances--(i) Limitations on accelerated benefit payments. If a benefit limitation under paragraph (d) of this section would (but for this paragraph (a)(5)) apply to a plan, the employer is treated as having made an election under section 430(f) to reduce the prefunding balance or funding standardcarryover balance by such amount as is necessary for the adjusted funding target attainment percentage to be at or above the applicable threshold (60, 80, or 100 percent, as the case may be) in order for the benefit limitation not to apply to the plan. This paragraph says, "If a benefit limitation . . . would . . . apply" The limitation wouldn't apply since the Plan is frozen and doesn't pay lump sums. Getting to 60% to facilitate benefit accruals also wouldn't apply. Perhaps, I've overlooked some wording that says you got to effect the reduction? Can you help trace the thread?

As I was soapboxing . . . Detroit_Free_Press_12_14_2008.pdf

Andy, I agree. The "relief" part of the bill seems to have only applied to benefit freezing. The restriction on non deminimis lump sum would still seem to be based on the 10/1/08 or later AFTAP. So, in my case, if my plan paid non deminimis lump sums, they would still be restricted. And just think how much better off some (restricted) plans would have been if they had distributed lump sums rather than lost 30%!

Unless I misread the crud, the relief applies only to the freezing of benefit accruals and not to the relaxation of the restriction to pay non deminimis lump sums. In such case, all the delightful provisions regarding lump sum restrictions still apply, including using the current plan year's AFTAP rather than getting to look back before the bottom fell out of the assets. Please take another look and confirm or refute. andy t.a.

The ERA of ought eight now allows the infusion of an assumed interest rate [3rd segment rate] into the determination of average value but it does not appear the corridor has been expanded. Thus, if assets lost 30% from At-1 to At, the maximum average value would be 70% x At-1 x 110%. or 77% of At-1. In short, you're still in the toilet, because you're down nearly 30% (the loss plus what you were expected to earn). Conclusion: Rah! Any disagreement?

I agree. Full text of the bill: http://frwebgate.access.gpo.gov/cgi-bin/ge...7327enr.txt.pdf (this should be "searchable" for you)Jeff, thank you .... Jeff

Thank you. And, it's searchable.

David, how can you tell -- Are there comprehensive summaries? The House Bill pdf does not apear to be searchable via acrobat. All I've been able to find is frustration!

Too much criticism about the new legislation. It will keep your bird cage bottom clean for 78 days. Like the rest of you, it was disappointing that ASPPA grabbed self-kudos. The law did clear up one thing. There was a post awhile ago about a difference of opinion on whether the amortization base was based upon the full unfunded funding target or the transitional percentage of the funding target. Those who read the law knew it was 100% of the funding target; those who read the the Pension Answer Book were advised otherwise. The good news is now the Pension Answer Book will not need to be revised.

Your point of certifying the AFTAP is well-taken. Now that I have enrolled in law school, I would opt to argue for the plaintif against whom the sponsor took action to deny payment of a lump sum. Also, your "impact of not deferring" is an excellent suggestion and I will consider adding it to packages with the client's approval. PPA is the worst piece of legislation since the rescinded TRA86 Sec 89. Hopefully, Congress is reading this board and will be engendered with the wisdom and courage to repeal it.

A client funded a whopping amount for their 2007 calendar year plan year to get the 2008 AFTAP to 80%. Hooray, they can distristribute lump sums to NHCEs through March 31, 2009. Of course, like all good Americans, their portfolio has decreased about 30% since January 1, 2008. Common story. Now, unbeknownst to a long-term employee, they are terminating the employee this December. (Merry Christmas!) This employee is nearly 60 and eligible for early retirement and entitled to elect a lump sum under the terms of the plan. It is possible the employee may choose to defer receipt. I recommended that they should at least provide an election package. Further, they should tell the employee that lump sum payment may be restricted after March 31, 2009 and perhaps later as well. Finally, I advised they should consult their legal counsel regarding my non-legal-but-practical advice. This begs the larger question. While not required by PPA, it is making more and more sense to provide annual communication to participants of even healthy plans that restrictions might apply at some later date -- even years down the road. This goes beyond simply burrying the potentially unpleasant news in the SPD, which in many instances will end up unread. Has anyone taken the "preventive medicine" approach? If so, it would be appreciated if you could share the experience along with identification of the various poisons you have considered ingesting.

[x] Yup [ ] Nope Otherwise, you will have overstated liabilities (and deductions). While Sec. 430 speaks of benefits accrued (and not vested benefits), it is reasonable to infer present value incorporates vesting as it would eligibility for an unreduced early retirement benefit (which does not alter the amount of benefit accrued but merely the payment).

My understanding is the same as Barrister Rigby's. You are only required to burn balances to reach either the 60% or 80% funding levels. In the example, w/o regard to CB, the AFTAP would only get to 75% so you would only need to burn enough CB to get to 60% if the client is not going to burn enough to get to 75%. Regarding the blanket "Burn d'em credit balances statement," it would seem doable. I believe the only restriction is that the election to burning occur prior to the filing of Schedule B which doesn't preclude making the election years in advance. The risk you run is that the person giving you direction today may differ from the person in a couple years. As actuary, you would need to take care to assure the strategy is continually communicated. It just seems safer to get the election. Also, note in my example Alternative (1)(b), the client contributes $112,000 more than in Alternative (1)(a) but preserves a net FSCOB of $1.6 million ($2,000,000 - $400,000). In short, don't be too quick to opt for a default election that could turn sour. PPA has moved us out of the era where you could explain to pension plan neophytes how the game works; you simply have to tell them what to do after you get a sense for what their election would be had they understood what you were talking about.

Please consider these facts. Calendar year plan. 2008 AFTAP >100%. 2008 minimum has been contributed prior to 12/31/2008. Assets 12/31/2008=3,600,000; FT=4,800,000; TNC=400,000. FSCOB=2,000,000. 7 Yr amortization factor = 6. Plan is ongoing and pays lump sums. Forget about interest adjustments and quarterly contributions -- they only apply in the real world. AFTAP (w/o CB) = 3,600,000/4,800,000 = .75 so plan must subtract FSCOB to determine AFTAP. Then, AFTAP= (3,600,000 - 2,000,000)/4,800,000=.33. Alternative 1, get an 80% AFTAP. (a) burn FSCOB and contribute in 2009 before 4/1/2009 for 2008 (.8 - .75) x 4,800,000 = 240,000. Do not add 240,000 to prefuding balance. 2009 Amortization = (4,800,000 - 3,840,000)/6=160,000. 2009 Contribution = 400,000(TNC) + 160,000 = 560,000, and total contribution = 240,000 + 560,000 = 800,000 (b) contribute in 2009 before 4/1/2009 for 2008 (.94 - .75) x 4,800,000 = 912,000. Do not add to prefunding balance. FSCOB is preserved. AFTAP=4,512,00/4,800,000=94%. 2009 contribution = 400,000 (TNC) but may use FSCOB to reduce to 0. Alternative 2. Forget about 80% AFTAP. We are required to burn enough of FSCOB to get to 60%. 60% of 4,800,000 = 2,880,000. So, 3,600,000 - x = 2,880,000 ==> x=720,000. We must burn 2,000,000 - 720,000= 1,280,000. 2009 amortization = (4,800,000 - (3,600,000 - 720,000))/6=320,000. 2009 contribution = 400,000 (TNC) + 320,000 = 720,000. Part of FSCOB is preserved but benefits are restricted. Q1: Agree with the mechanics? Q2: Any other options I may have overlooked? Q3: My particular client at least for now is highly profitable so I will be recommending (1)(b). Any disagreement? Q4: Has anyone figured out the odds that the client would understand this? My P.S. for the day: Much of the confusion of PPA is attributable to the application/nonapplication of credit balances. For many plans -- especially those that pay lump sums, the recent Armegeddon will cause most if not all of the FSCOB to be burned.

How can you be so dead certain the plan covers minorities?

Perhaps, you can modify the attached Restricted_Benefits_Notice.pdf

The suggestion was meant as no more than relating to the client the potential exposure and consequences. It is the client's decision whether or not to undertake any corrective action. It is not advised that a service provider make the decision to ignore the problem. I would suspect if you're delegating blame, hand some over to the Bank Trustee who failed to apply the rules.