Andy the Actuary

Wouldn't you, or couldn't you, or shouldn't you set up the DB plan to offset by the theoretical pension attributable to the PS balance arising from PS contributions from the date of inception of the DB plan? This would require some separate accounting of the PS plan or a new PS plan.

Participant age 54 has average three year comp of $50,000 and there is no intention to increase this compensation. Plans NRA is age 55 and provides for in-service withdrawal. Person will have accrued $50K benefit by 1/1/2009. Person is not retiring and there are other participants so closing down plan is not attractive. Plan NRA will be increase to 62 in 2009 when participant reaches 55. The Plan will actuarially increase accrual rates in accordance with regulations. Person will necessarily suffer a forfeiture because can't take an in-service distribution at 55 so will forego receiving payments from 55 to 62 and benefit at 62 will still be $50,000, so actuarial increase won't keep the person whole. Have I read this situation correctly or is there some out I am missing?

The "gray" area is if the EA certifies the 2009 AFTAP to be at least 80% after March 31 but prior to May 1 and no lump sum benefits are payable effective 4/1/2009. In such case, some actuaries, attornies, and I take the position no notice need be given. My rendition of Circular 230: If you rely on this advice, don't blame me.

Depending on the size of your "non-frozen" group, (a)(26) may fail a year after the change (technically, at the end of the plan year following the plan year that contains the effective date of the change). David, that's an excellent point. I looked at one corporate plan. It has about 275 active participants of which 48 are age 55 or older (NRA=65). Another has 90 participants, of which 24 are age 55 or older (NRA=65). Another has 71 participants of which 21 are age 55 or older (NRA=65). These die right away as you suggested.

Tests under 410(b), 401(a)(26), 401(a)(4) and possible partial plan termination. If no HCE's benefiting, then 410(b) and 401(a)(4) will not be of concern. 401(a)(26) is of particular concern, especially as participants benefiting waste away. That is, at some point, test is likely to fail.

The proposed IRS regs provide an example of actuarially increasing the benefit rate (from 45 to 65) to satisfy the regs. IRC Sec 404(o)(4)(A), however, provides that in determining the cushion about for HCEs in small plans, Target Liability (TL) attributable to benefit increases occurring with the last 2 years are to be ignored. Clearly, the accrued benefit is increased under the proposed method. However, the intent of the increase was strictly a value preserving measure and not an increase per se. That is, TL is at least in theory unchanged. My presumption, therefore, is that no amendment has occurred that cause a portion of the TL not to be counted as a result of IRC Sec 404(o)(4)(A). Any comments?

For the record, it's AndyH's and not Andy.t.a.'s neigborhood that is famous. I live in a harmonious, peaceful, and sleeply town. We only have shoplifiting, graft, political dawdling, and public scandal in my hood.

As my avitar shows, I'm a propeller head and not an attorney. Nonetheless, here's what I would advise and would follow if I were in your shoes: (1) The recipient or recipient's power of attorney should send a written request to the Plan Administrater specifying precisely the action they desire taken. The request should include a copy of the power of attorney if applicable. (2) Provide this request to your (firm's) legal counsel for an opinion and possibly a response to the requester.

Given I have recovered from my mental set, your alternative (a) makes the most sense (actually what makes the most sense is for Congress to repeal the 105% provision). Alternative © appears to dismiss the flavor of the calculation so I will dismiss further discussion about it. Alternative (b) says pretend it's now "x" years in the future but use the three segments determined today, so that you're in effect using the first segment when no payments are theoretically being made in the first 5 years. Alternative (a) reflects today's yield curve; alternative (b) assumes today's yield curve will apply in perpetuity. Further, alternative (a) is consistent with the funding valuation of lump sum calculations where the basis is 417(e) and 415 does not apply. The hard part to explain is that you could have two brothers (they could also be sisters) of different ages with the same plan benefit. Alternative (a) could produce different 415 lump sums (whereas alternative (b) would not). Nonetheless, I vote (a). By the way, my vote was bankable only during the Great Depression!

Thank you for your spare change. The Plans I was thinking about use the 417(e) assumptions. I am a slave to my mind set.

Because I am assuming a lump sum and I don't believe that is the proper way to do it. Please bear with my (possibly ignorance). Isn't what I'm suggesting what the December 2007 proposed regs indicated to do if the beneift is payable in a lump sum. If not, what am I misunderstanding? "In the case of a distribution that is subject to section 417(e)(3) and that is determined using the applicable interest rate and applicable mortality table under section 417(e)(3), the proposed regulations would provide that the computation of the present value of that distribution will be treated as having taken into account any difference in present value that results from the use of actuarial assumptions that are different from those prescribed by section 430(h) only if the present value of the distribution is determined by valuing the annuity that corresponds to the distribution using special actuarial assumptions. Under these special assumptions, for the periodbeginning with the annuity starting date, the current applicable mortality table under section 417(e)(3) is substituted for the mortality table under section 430(h)(3) that would otherwise apply. In addition, under these special actuarial assumptions, the valuation interest rates under section 430(h)(2) are used for all periods (as opposed to the interest rates under section 417(e)(3) which the plan uses to determine the amount of the benefit)."

Why wouldn't you simply limit the accrued benefit by 415 (i.e., for a high paid person, to the 415 dollar amount) and apply the segment rates and applicable mortality table (as of the ASD)?

Maybe someone should write a book entitled, "Two Actuaries, Three Four Opinions." Try for five?

By and by, in 35+ years of this stuff, have never even seen such a situation even considered. The employee having to start over on the the vesting schedule would be terminally adverse p.r. A sponsor who would perpetrate (to use Sieve's words) this subterfuge would likely loose all but his unemployable employees.

This discussion makes me pine for those halcyon days when an entire workday was required to develope N's and D's by hand using yellow columnar worksheets and a mechanical calculator that looked like a cash register.

Your point about this action being a potential subterfuge and that in effect there is but one plan is well-taken but can you cite the code/regulations thread to support it? Perhaps, the real question is what is essentially a legal, and not an actuarial question, doing on the EA exam?

The Plan that was partially terminated has not been terminated. Ergo, the new plan cannot be a successor plan because there was no predecessor plan. When I wrote the EA exam in 1977, the essence of the test was essentially arithmetic and being facile with the widely-applied "alternate funding standard account" and "short-fall funding method." It did not contain "word" problems which were left to the attornies. The answer appears incorrect as I reread the regulations under 1.411(a)-5. That said, someone must have interpreted partial termination to mean termination. I saw the words a few times, "termination within the meaning of 411(d)(3)(A)." This section of the code deals with termination and partial termination.

Let's stick to a calendar year plan with January 1 valuation date for discussion. It is clear that 2007 contributions made in 2008 are included in plan assets for determining the UVB. It is also clear that after 2008, prior year accrued contributions must be discounted to January 1. What is unclear (as my evidence will show) is whether or not 2007 contributions made in 2008 are discounted back to January 1, 2008. ASPPA (No. 8-10) says "no." More important, instructions for completing the PBGC forms explicitly say "No" ("For Premium Payment years beginning in 2008, such prior year contribution are included without discounting"). Now, technical releases from both Deloitte and JP Morgan say "Yes." More important, I do not see in PBGC regs. that there is a discount exclusion for 2008. Frankly, an exclusion for 2008 seems totally inconsistent with how the PBGC has historically treated accrued contributions for premium calculation purposes. On the other hand, the PBGC may be serving grace to those end-of-year valuations. Will someone with fresh batteries in his flashlight please shed some light on this dilemma?

So for a new plan, would a short plan year followed by the full plan hear (e.g., 7/1/2008-12/31/2008, calendar year thereafter) require IRS approval? There does not appear to be an exception for new plan short first year plan years. How do you apply for such approval?

Back in 2007, a client (20 or so participants) inadvertently mailed the 5500 to the PBGC. When the IRS notified the client that the 5500 hadn't been received, the client realized the clerical error and immediately mailed the 5500 to the EBSA. A few months later, the IRS issued a notice of assessment of late filing penalties of over $15,000. The client had submitted all filings by certified mail. We provided the IRS copies of the mailing receipts which confirmed the timeliness of the client's actions. Since the client had a history of always filing timing, the IRS forgave all penalties. 5500 filers will likely never have to demonstrate timely filing. But if they do, having the documentation cements their case. This is all obvious but you may wish to consider adding to your cover letters that the forms be filed, preferably by certified mail. This blog will self-destruct in 2009 when efast filing is required.

A plan provides for lump sum distributions. The plan has a COLA and for purposes of lump sum distributions, 3% is assumed. The regular actuarial equivalence is 71GA and 7% interest. The plan has been amended to allow for inservice retirement on or after age 65. Upon the employee's later termination of employment, the plan stipulates to calculate the accrued benefit and offset it by the actuarial equivalent of the distribution received. The obvious question is what is that? My recommendation is to have the plan define how the adjustment is made rather than simply saying "the actuarial equivalent." Assume an employee takes a lump sum at 65 and later terminates employment at 70, it would appear that an appropriate way to handle this is to calculate the accrued pension at age 70 and offset it by the age 65 pension increased by 3%. Now, assume the employee takes a monthly pension at age 65 and later terminates employment at 70, it would appear that an appropriate way to handle this is to accumulate the monthly payments with 7% interest and determine the offset by dividing this acculation by an annuity factor at age 70 computed using 71GA, 7% interest, and the assumed 3% COLA. Clearly, if the employee elects a lump sum, there is a whipsaw effect. Any suggestions?

Will he be closing or selling his business? If he is selling the business, the buyer might take over the pension plan and as such, would pay some Y% on the dollar of excess. If the buyer's tax rate is x%, then Y% would be less than (1-x%) since buyer could start his/her own plan and take a tax deduction of x%. These situations are under close IRS scrutiny so would need to retain actuary [not I] and attorney who has dealt with such transactions.

"IRS sets forth fools", or was that "sets forth rules"? We will be scrambling like everyone else to get the election issues right. My understanding in general is that 436 burns are a direct result of the AFTAP measurement event. 430 burns are the logical best choice if quarterly contributions have not been paid (for most plans but not necessarily all plans), and any other credit burns are negotiated between the actuary and the plan sponsor. Then the elections have to be executed by the plan sponsor so they can be reflected in the schedule SB. Is that your understanding as well? I'm having my clients elect everything other than the option to pay my invoices. I am not, however, having them elect to maintain the FSCOB as there appears to be no automatic disposition of it if they don't. I've incorporated some wording to have the client apply the FSCOB to 2009. E.g., "To the extent that law permits such election, I elect for the Plan’s Enrolled Actuary to apply $2,772 of the Funding Standard Account Carryover Credit Balance as of January 1, 2009 to satisfy the four quarterly 2009 contribution obligations under IRC Section 430(j). I understand that as of this certification date law neither provides for nor proscribes such an election in respect of IRC Section 430(j) and that if law changes, another election may be required. I give this election unconditionally and understand that they are irrevocable." PPA law in respect of plan sponor elections work just fine so long as life is timely. This means they will rarely work. And then . . .

IRS proposed Reg 1.430(f)-1(b) is entitled "Election to maintain balances." In fact, -1(a) provides that "paragraph (b) of this section sets forth fules regarding a plan sponsor's election to maintain a fscob and pfb." I was of the understanding that the employer must make an election to burn credit balances. However, having to elect to maintain blances creates the convolution that if you must elect to maintain the balance, and you must elect to burn the balance, what occurs if you make no election whatsoever? Is anyone advising their clients to elect to maintain the FSCOB? I presumed we were simply dealing with some errant wording?

Yes.Plan amendment that creates the "partial freeze" must be adopted before its effective date (but you knew that). Also, see IRS Reg 1.401(a)(26). There could be coverage and/or 401(a)(4) issues, including the question of whether the grandfathered EEs will also be covered by the new (k) plan. I've probably forgotten something. It would seem that Sections 401(a)(26) and 401(a)(4) would not apply because we're only talking about union employees who should be excluded from consideration. Is there an issue which I may have overlooked? Is there any more to do then freeze the plan and provide a 204(h) notice?