Andy the Actuary

Mr. Ak2ary: The erstwhile IRC 412©(8)© provides that the retroactive amendment "does not reduce the accrued benefit of any participant determined as of the time of adoption." 412©(8) also says the retroactive amendment is "deemed to have been made on the first day of the plan year." It does not (unless I am misreading) say that it is deemed adopted as of the first day of the plan year. So, do you interpret "deemed to have been made" as "effective" or "adopted?" Do the words "time of adoption" pertain to when the amendment is signed or the effective date of the amendment? Perhaps, these ambiguities are the source of contention overwhich a dichotomy of opinion arises. Agree wholeheartedly with your conclusion that the IRS may not modify the statute regarding using a single interest rate. Nonetheless, you will find that the 1983 IRS 415 Regs. contravened the statutory definition of high three average compensation, so there is a precedent. Happy New Year, andy T.A.

David, thank you. I had intended to include this in the letter I will send. It will also address the possibility for small plans of excluding pre-retirement decrements as well as proposing a single interest rate alternative (e.g., the lessest of the three segment rates). It simply does not make sense to impose PPA's overhead on small plans. I urge practitioners of small plans to respond to the proposed regs. Whether or not they choose to act, the IRS needs to hear about pain and suffering that truly doesn't make a result any "better" -- it's still an estimate. Thanks for your comment and Happy New Year. andy T.A.

In perusing the IRS's (near) New Year's Eve present of a 74 page proposed reg, we note with sadness the demise of IRS Rev. Rule 77-2. Am I to understand correctly that if say in January '08 we decide to freeze a calendar year plan (that contains the 1,000 hour service rule) effective March 1, we must recognize a full TNC in the funding equation? In such case, such result -- at least in theory -- could force a plan to become overfunded. In short, if you want to freeze a Plan and pay a reduced fare, you now have to have an amendment adopted (sounds like that means signed) by the valuation date, which will in most cases be the first day of the plan year.

Not only would I agree but many of the professionals for whom I have administered small DB Plan generally work no more than 1 hour a year!

Available benefit if benefit distribution restrictions apply is lesser of 50% of lump sum or 100% of PBGC maximum. We have the following from our joyous August proposed IRS regulation: (iv) Present value of PBGC maximum benefit guarantee. The amount described in this paragraph (d)(3)(iv) is, with respect to a participant, the present value . . .of the maximum benefit guarantee under section 4022 of the Employee Retirement Income Security Act of 1974, as amended. Does this mean that a Plan not subject to Title IV (e.g., one-person plan) cannot pay a lump sum since there is no guarantee under ERISA or is this simply what the words say and not the intention, which is the reference to the PBGC maximum is simply a number that applies irrespective of whether the Plan is subject to PBGC coverage? Unless I overlooked it, I don't see where the proposed regulation states the latter.

Seems like AL uses $18,000 (1/10 of $180,000) and UCNC=$0 because limited benefit is the same eoy as boy. Since UC method developes AL, you're done. In year two, the AB on 1/1/2008 is 1/10 of $185,000 = $18,500 and AB on 12/31/2008 = 2/10 x $185,000 = $37,000. You would develope UCNC based upon benefit that is 1/10 x $185,000. Prior to the Putrid Pension Act, the difference in AL 1/1/2008 attributable to the $5,000 increase in 415(b) would have been treated as a Plan amendment and a 30-yr amortization base would be established. Do you come out with more favorable results using EAN method, though in 2008 you're effectively back to UCNC?

There are three choices: (1) IRS relief is forthcoming (2) IRS relief is not forthcoming (3) You will not be able to understand or apply the IRS relief What do you do after 5 years? It's always been apparent that small plans are around for the ride and must go where the driver takes them. Else, why would you have to employ a yield curve rather than a single interest rate for small plans? (2) above may be the IRS response -- the IRS has been aware of the retrospective valuation issue since day one and has chosen not to address it.

Mr. Jay21 Not being a barrister, forgive me if I question how an actuary is bound to compute benefits according to the plan document but in a way that knowingly contravenes the law (if, indeed, that is the case). There is the walk-away option if the client refuses to act in a law-abiding manner. Given my recent displeasure with the JB application fee increase, my mental health precludes me from reviewing the JB regs at this time. My recollection, however, is they contain some words in respect of professional conduct that would preclude the EA from acting in the manner you suggest. All this being said, your conclusion may be correct. Happy holidays, andy T.A.

I am a minor actuarial firm but concur with you. IRS Regs. 1.417(e)-1(d)(4)(i) defines the time for determining the interest rate for the period that contains the annuity starting date. While (4)(iii) inidicates that a Plan Year is a permissible stability period, (i) makes it clear that such Plan Year must contain the annuity starting date. Yet, since I am a minor consulting firm, I would request the major consulting firm to provide a citation (e.g., IRS Rev. Rule or PBGC TAM) that supports their position. Major consulting firms sometimes have resources beyond the capabilities of minor consulting firms. Sometimes. Perhaps, somewhere out there is printed word that freezes the interest rate as of the Plan Year of termination. Presumably, distributions were made in 2007 because of the delay in obtaining an IRS determination letter? Perhaps even more fascinating is what brought about your involvement after distributions have been completed or are almost completed? Finally, I note that the 10/04 GATT rate was 4.86% whereas the 10/06 Gatt rate was 4.85%. These rates serendipitously produce almost the same results as a practical matter, differing generally by no more than .3%. Assuming there is no justification for using the 10/04 GATT rate, Is it intended to pay additional amounts to avoid the plan disqualification exposure? Happy holiday, andy T.A.

Nice of IRS to pass on the increased cost to the continually diminishing supply of plan sponsors. It has always been presumed that PPA2006 was enacted solely for the purpose of increasing actuarial fees without providing an iota of benefit to the client.

Absolutely, the IRS is right in its comparison but that argument, in itself, by no means justifies a 1000% percent increase! So, if I'm paying $2.65 for a gallon of gas and the price increases to $4.50, I should be happy because the price in Honk Kong is $5.62? I'd prefer Caracas price of 14 cents though the shipping and handling would likely eat up the savings. Happy new year, andy T.A.

This has an odor about it. Assuming NRA=65, and employee hired at 58 earns a normal retirement benefit of 7/35 = 20%. Your formula would have an accrual pattern of 1/35, 2/35, 3/35, 4/35, 5/35, 6/35, and finally 7/35 of 20% which would then be overridden by 20%. Sounds like a "scrivener's" error and "the greater of service at NRD or 35" should simply be "service at NRD." If not, you've got a backloading problem. Happy holidays, andy T.A.

David, thank you citing the reference. The Joint Board does not have a website per se. Rather, as you have indicated, you find JB information on the IRS website. Splitting hairs but thought it was of value to point out that a google search for "joint board for enrollment" will not locate a "Joint Board" website but rather will locate the IRS URL. I knew this but the person [name withheld] I spoke with at the IRS referred to the Joint Board website. Happy holidays, andy

Happy New Year from the IRS. The IRS is increasing the reenrollment fee from $25 to $250 (yup, 10 fold). The recently published final reg. indicated an effective date of January 22, 2008, which led one to believe that you could get your application in before then and pay the bargain basement price. I spoke with a representative who indicated: (1) The $250 renewal fee will apply to the new enrollment cycle that begins April 1, 2008 so no early-bird specials; and (2) There will be no mailing of the renewal application (can't use any of that $225 increase for postage!) and it will be incumbent upon EAs to go to the Joint Board Website to get the new application. (3) The new application is not yet available and should be available in mid-January from the Joint Board for Enrollment of Actuaries website, which I believe is non-existent. Go to the IRS wbsite. By the way, the IRS justification for the steep increase is, "The dollar amounts of the fees are not, however, substantial enough to have a significant economic impact on any entity subject to the fees. The amounts of the fees are commensurate with, if not less than, the amount charged by professional organizations. Persons who elect to apply for enrollment or renewal of enrollment also receive benefits from obtaining the enrolled actuary designation." In short, the IRS is increasing the fee because they can.

Andy, thank you.

Anything but scarcastic. So, if I understand, a former employee would have to agree not to apply for benefits. Is that what is meant?

But, how does this decision empower them to ignore the terms of the plan?

The following URL provides a handy capsulation of applicable interest rates: http://www.datair.com/rates.htm

AndyH, you indicated, "Many people would advise against such a payment." On what basis would you deny a participant a distribution to which he is entitled under the terms of the plan upon termination of employment? Is there a chapter and verse you can reference.

Note that accrued benefit could change from 12/31 to 1/1 owing to increase in the 401(a)(17) and 415(b) limits.

Have a friend who is teaching probability and statistics and I mentioned to her that there was approximately a 50% chance that a person would live to life expectancy. She asked could I prove it. Being immersed in libation, nothing came to mind and I didn't care to reinvent a wheel. Can anyone point to a demonstration (e.g., society transactions, book on life contingencies) of this intuitive conclusion?

This does not answer your question and is not intended to insult your intelligence, but note that the Plan should codify however the restriction/distribution will be treated.

How about plan provides flat benefit fully accrued? Limit by 415 and you should have a benefit to value on first day of plan year.

And allow me to introduce a related question that I do not believe has ever been answered: An amendment increasing benefits for HCEs is effective 1/1/2006 for a calendar year plan. Is the first plan year it can be recognized for the UCL maximum the plan year beginning 1/1/2008 or the plan year beginning 1/1/2009. I've asked this at three EA meetings. Speaker #1 always answers, "Well, of course, 1/1/2008" and then Speaker #2 interjects "I'm not so sure."

Mr. Jay, there will be circumstances where you will want to continyue to determine costs under "antiquated" but actuarial sound methods. For a stable group covered under a final pay plan, TNC will increase due to passage of time and could at some point become obnoxious. In such case, it would make sense to advise the client upon adoption of PPA funding that minimum funding could lead to pushing costs to into the future. Perhaps, the client would want to continue advance funding on a more comfortable systematic basis to avoid this dilemma. Of course, we would have to advise the client that just because you create a credit balance does not mean you'll necessarily be able to use it!