Andy the Actuary

Thank you to Messrs. Preston and SVP. We are all sitting in the same ballpark watching the same game unless the IRS specifies computational details. The difference between 121.16 and 121.24 is .07% if the 121.24 is the golden number. Rounding and method differences seem inconsequential in light of using stale interest rates (lookback month of August 2007 for distribution in December 2008). I've always used commutation columns (thank you Messrs. Spurgeon and Jordan). The 11/24 approximation will lead to about .05% difference relative to calculating using first principles. But to quote Mr. P, the computation becomes FUGLY (real nasty) when using commutation columns. Effen, haven't written an actuarial exam since 1973 when gasoline contained lead but had understood that commutation columns disappeared. Have they also resurrected columnar yellow paper spreadsheets that had big chuncks of wood floating around? Thanks for all help.

Thank you. Good points. "Relative Values?" is that the piece of paper the we spend so much time preparing but no one reads?

Take a look at the notice. It may be that you could have an NRD 65 but an earlier ERD. If so, case closed.

Being an independent cuss, I developed a generalized spreadsheet (which I'd be happy to share) to calculate lump sums under PPA 2006. Since the use of commutation columns has been outlawed in the state of Missouri under penalty of death, I used first principles. I figure most of you are wiser than I and have purchased software that will accommodate the new law. In any event, if someone else has a mechanism in place, I would appreciate a sanity check on my calculation mechanism. The calculation example uses the 2008 applicable mortality table and the October 2007 segment rates: 4.85%, 5.02%, and 5.09%. I am valuing a deferred annuity to participant who is currently age 61 and 10 months of $1 payable monthly at age 65 and 4 months on a 120 months certain and life basis. There is no death benefit if the participant dies during the deferral period. The factor I developed is 121.16. Anyone come within a tolerable percentage? Any help is most certainly appreciated.

I can honestly say that I have a number of plans that offer a J&75% or J&66% and have never seen these options elected. It's probably just time to include the x*&$#@! option and quit talking about it.

Because the yield curve could become inverted (or is that perverted), you might want to use the least of the 3 segment rates. Presumably, you are using greater than the minimum but want to avoid computational complication? By the way, have you given thought to whether or not linear interpolation for non-integral ages still makes sense if you are using the 3-segment approach? We have to balance practicality with theoretical accuracy. Now, I know for sure that nothing makes sense. Congress comes up with the segmented yield curve because it's more accurate and then IRS Rev. Rule 2007-67 will allow you to use an interest rate that could be 16 months out of date (i.e., look back month of August, calendar year stability, annuity start date = december).

So, let's say a plan offers as the automatic survivor annuity a J&50% and that the Plan also offers an optional J&100%. Can we simply redefine the automatic survivor annuity to be a J&100% and the optional to be a J&50% and then we don't need to offer an optional J&75%?

Thank you, I believe you have shown the net of my pension entries.

Hope this helps: http://www.taxlinks.com/rulings/findinglist/revrulmaster.htm

Would someone please comment whether or not they agree that this is what the accounting entries would look like: PBO $1,000 Assets $1,020 Funded Status $20 Loss $900 Prepaid $920 Liability for Pension Benefits* 920 (debit) ==================================== AOCI 920 (debit) Liability for Pension Benefits* 920 (credit) Liability For Pension Benefits 20 (debit) AOCI 20 (credit) *Or whatever we called "Prepaid Pension Expense"

Assuming all of the partners are HCEs, there should be no problems having different benefit formulae so long as there is no discrimination against NHCEs. This suggestion may work if we're talking about a small group.

You're not alone. I'm personally and professionally disturbed and angered that I sound like an uninformed idiot in advising my clients. Sooner or later the clients need numbers and not theory. We're supposed to have systems in place in 2008. I don't know what systems to build*. It's further distressing when you see literature (from major consulting firms) that purports to serve up the gospel, but in reality they have no answers. Unfortunately, the administrative bodies' delay (they've had close to a year and one-half and they're still worrying about mortality tables) does not extend the PPA effective date. I believe the House has entered and the Senate is about to enter hybernation until January so don't expect immediate relief. I pray someone will read this comment and point out the light I've overlooked. *I hope everyone realizes that at this juncture, we simply believe we understand how the layered interest rates will operate, and in particular, in respect of plans that pay lump sums. To my knowledge, this is all educated guesswork. I may have missed some communication, but I've seen nothing from the IRS that details the calculations.

Social Security Administration provides a location service: http://www.socialsecurity.gov/foia/html/ltrfwding.htm You may also wish to check to see if the participant is diseased. Here's one reference tool: http://ssdi.rootsweb.com/

I observe auditors who perform their job as auditor. Then, I see those who act as if they are combination Gestapo going out of their way to complicate life and find something wrong. While the auditors may be empowered (by AICPA) to go back 20+ years, from a practical perspective 20+ years is totally unreasonable despite that others have claimed it is. Client should talk to the audit partner and not the kid du jour* the firms deploy. If all else fails -- get a new auditor. When interviewing, ask them to provide copy of their audit guidelines and discuss with them before hiring. 20+ years is unheard of. *Here is such example: Auditor had completed their own version of some benefit calculations (under an extremely complicated plan) and had advised (a clerk at the client) to go back to former employee and get money. The original calculation had been completed by a big name actuarial consulting firm. I advised the client: "The payment of benefits is a legal and not an accounting matter and would caution if you have questions of how to proceed, to discuss with and obtain guidance from your legal counsel. However, before you take any action on the "Distribution Testing Results" determined by your auditor, I recommend that their exhibit along with their calculations/explanations be forwarded to big name actuarial firm for their review. The big name actuarial firm calculated and certified benefits and if there is an issue, they should advise you what action, if any, should be taken.

I am immersed in overkill paradise with this small not-for-profit (Plan has $5 million in assets) that uses a fancy investment manager and big-time law and accounting firms. Over the past seven years, the Plan would have fared better had they put their money in a matress, and I'm not being the least bit facetious. Since the IA has done so poorly with money, I can't help wondering whether she is recommending the fixed income approach to protect her derriere or she is misguided or because there is some substance there. I doubt the substance answer. Since I was recently brought into this overblown mess, I must tread lightly as I'm not sure yet where the politics lie. I have, however, articulated that the approach is not appropriate for the particular situation and the reasons why. I've also been sucessful at eliminating her participation at various plan design meetings. I simply wanted some reassurance that I was not overlooking something that supports the IA's position.

The word immunization was my word. Actually, what the investment counselor (she) was saying was that you could matchup assets and liabilities so they moved in tandem and so that once you were "fully funded," you'd always remain "fully funded." I thought, "Sounds wonderful, but since I'm from Missouri, I have to be shown. In particular, how liabilities emerge can not be predicted with any degree of confidence. Further, how can returning less investment reduce contributions when the scheme fails?" In short, I didn't believe it. Yet, I am reluctant to pooh pooh an idea until I have a firmer grasp of the situation. I.e., I allow for the possibility I could be wrong, though it hasn't happened in several minutes.

I am actuary in behalf of a frozen, salaried DB plan with 60 participants. The Plan offers unreduced retirement for persons who retire from active service after reaching age 62 and completing 20 years of service. For other actives (and terminated vested), an actuarial reduction applies if payments begins before age 65. The Plan also offers lump sum payments to about 2/3 of these participants on a minimum actuarial basis (though the immediate payment would be lump summed). The Plan is currently underfunded (on whatever rationale basis you would like to postulate). The Plan's investment counselor is suggesting that once the Plan gets funded on a PPA 2006 basis, that the funded status can be maintained by immunizing the portfolio. I had always thought of immunization making sense for a large groups of pensions in a periodic payout status where the only contingentcy is mortality. In this particular situation, the patterns of distribution are unpredictable and leveraged by a few handfuls of participants. So, it may not be possible to maintain a 90% funded percentage. In addition, it would seem that by investing purely in fixed instruments, the plan would be foregoing investment opportunity and the bottom line is that aggregate contributions (at least in theory) would be higher. Any comments on the counselor's investment recommendation? Am I overlooking the obvious?

A DB plan sponsor amended the plan to offer terminated vested participants the right to an immediate lump sum (they already had the right to take a lump sum at early or normal retirement date). There are a few participants who elected not to take an immediate lump sum (can you believe?) and so the Plan has decided tol purchase a deferred annuity in their behalf. The annuity contract will include the lump sum option. However, the insurer indicated the contract will pay lump sums in accordance with the Plan provisions in effect at time of annuity purchase. So, a lump sum paid at a later date would not, for example, reflect PPA2006. This allows the possibility that two persons (one for whom the annuity was purchased, the other, an active employee who later terminates) could receive lump sums at the same distribution date but calculated on two different actuarial bases. Can anyone who has had experience with a similar annuity purchase provide any legal basis that the insurance company's treatment relinquishes them from applying an actuarial basis that would otherwise have applied had the annuity not been purchased?

Rev. Rul. 79-237, 1979-2 C.B. 190, provides that minimum funding standards apply until the end of the plan year that includes the termination date. Does this statement continues to be valid under PPA2006?

To facilitate hiring, some not-for-profit plans credit service for employment in a related industry after completion of waiting period. Some phase it in such as one year for each year of service with the new employer; others, credit after completion of so many years of service. Typically, the prior service picked up is counted for benefit calculation purposes only. As long as you have a small number of other (home-grown) HCEs, you likely will not have a 401(a)(4) problem. Also, it depends whether the Plan has always had this feature or your adding it now (re: grants of past service).

If you're terminating a PBGC covered calendar year plan effective 12/31/2007 and you want the PPA lump sum basis to apply as your standard, your plan amendment that terminates the Plan should contain it. The PBGC may not allow adoption of an amendment to reduce benefits after the Plan termination date. I believe there was an ASPPA ASAP covering this very issue.

It should be noted (if thumb-wrestling is in order over this issue) that the pre-termination restirctions do not apply "if the Commissioner determines that such provisions are not necessary to prevent the prohibited discrimination that may occur in the event of an early termination of the plan" (IRS Reg. 1.401(a)(4)-5(b)) In short, remove the provision from the plan and seek a determination letter. We have seen the IRS not question the removal, in particular in respect of DB plans sponsored by not-for-profit employers. Whether you announce the removal in the cover letter is a matter of legalistic style. I know lawyers on both sides of this fence.

There is no such thing as discriminating against an HCE. 401(a)(4) pertains to discrimination in favor of HCEs over NHCEs.

If this were a DC plan, you would record the contribution on 5500 without question. Similarly, why wouldn't you count the DB contribution on Schedule H or I ?

From memory, if you contribute within 60 days of a missed due date, the notices are waived. Else, provide the notices or be sentenced to pension prision or mulcted into bankruptcy.