Andy the Actuary

Don't blame you for not reading this and surprised no one made the comment that I must be ghostwriting IRS PPA regs. I'll distill the issue to how do you know whether or not to make quarterly contributions or use the credit balance when you're AFTAP certification is being made at a much later date. Say in the example in September. I could envision situations where you could have either contributed the first quarterly installment or applied the credit balance. You decided to apply the credit balance but when you got to the point of AFTAP certification, you needed to burn your credit balance for other reasons. Then, you missed paying your quarterly and as you pointed out, your minimum increases. However, you have now failed to provide timely notice to participants that the quarterly contribution was missed. Andy the Actuary's Law: Low probability events are the first to occur.

Okay, what am I missing? Let's look at an example. FSA credit balance 12/31/2006 = $268,000. Plan assets 1/1/2007 = $5,340,000; CL(RPA) = $6,340,000. Funded CL% = ($5,340,000 - $268,000)/$6,340,000 = 80.00% (without CB, FT%=84.23%). Have no good fix on what assets will be 12/31/2007 nor what PPA2006 FT will be. Assume enough contributed to preserve $268,000 credit balance. Comes April 15, plan sponsor contributes first quarter installment of $100,000 and comes July 15, plan sponsor contributes second quarter installment of $100,000. Then, we perform valuation and find that assets 1/1/2008 = $5,840,000 and FT= $5,500,000, and that TNC=300,000, so that minimum contribution for 2008 is $0. In short, not only did we not have to make contributions but we did not have to use any of the $268,000 carryforward balance!. Now, assume same facts, except we assume we will use carryforward credit balance to offset quarterly contributions. Now, suppose we perform valuation and find that assets 1/1/2008 = $5,340,000 (no growth) but that FT= $6,140,000. So, AFTAP=($5,340,000-$268,000)/$6,440,000=78.76%. So, we would like to burn (80%-78.76%) x $6,440,000 = $79,856 of credit balance so that AFTAP=80%. But, we if burn $79,856 of credit balance, we are left with credit balance of $188,144. We can’t do this burn and lump sums are restricted. So unless I am misunderstanding something (a very realistic possibility), I don't know how to advise to use credit balances in advance. This is consistent with what I concluded a long time ago about credit balances under PPA. They are only available if you don't need to use them, and we'd likely be saner in many situations simply to burn the carryforward credit balance and not create any prefunding balances. Any comments, criticisms, or commiserations would be appreciated.

My gripes with the FASB pertain primarily to FASB158 which may force a number of plans to convert from final pay to career average and to the FASB's adherence that end of fiscal year measurement date makes reporting and comparability more meaningful. Otherwise, I have no issue with FASB87/88. I have not read the report to which you referred. I apologize if you are an accountant and I hit a nerve, which was not my intention. Rather, we are entangled in seaweed for a reason: "The fault, dear Brutus, is not in our stars, but in ourselves."

All the kidding aside (I'm included in the set of jokesters), we are witnessing the demise of an important discipline of the actuarial profession. Instead of focusing their attention on greybook minutia, many of which pertain to pension plans with $50 billion in unfunded liabilities, the actuarial profession should have focused on educating legislators and the public and lobbying for practical laws. When the full-funding limit began taking away new investment money in the early 1980s, the actuarial profession should have educated the public and not allowed investment people to make 401(k) a household word. And let's forget that the actuarial profession has done little to combat the FASB. I've attended EA meetings fairly religiously since 1979 and am always flabberghasted to witness big-guy actuaries sit at podium and almost xxxxxxxxxx over the rush they get from their mastery over of this meaningless crud. It's easy to be cavalier when you're nearing retirement as so many of them are. Lost in all of this are the employees who will now bear the investment risk for an inherently smaller pensions. "For all sad words of tongue and pen, The saddest are these, 'It might have been'".

In the good old days, quartlerly contributions could be satisfied if a plan had a healthy credit balance. However, going into 2008, we cannot assure we not have to "burn" these healthy credit balances. The answer is not (for calendar year plans) that the actuarial certification will be completed by March 31 so you'll likely know the 2008 contirbution. For many plans, draconian consequences or otherwise, the sponsor will not provide the census and assets in a timely manner. Any thoughts?

Thank you, but 412 does not apply to PPA2006. So, then what?

Actuaries will thumb-wrestle over how large an active employee population must be before actuarial assumptions have statistical significance. Like Supreme Court Justice Potter Stewart (who couldn't define pornography but knew it when he say it), I feel the same about actuarial assumptions. It would be inappropriate not to assume pre-retirement decrements for the California State Teachers Retirement System and conversely, postulating pre-termination, disability, mortality, severance assumptions for a one-person DB plan makes no sense. Plans in between are subject to debate. Under current law, using "no preretirement decrements" certainly affects the calculation of current liability, which in turn could affect the deductible limit. I'm unaware of no printed guidance that this assumption is permissible and yet this is common treatment. However, there appears to be no legal issue with employing this assumption to compute the basic cost elements (e.g., individual aggregate normal cost) so long as the assumtpion is reasonable. To the contrary, under PPA, the "no decrements assumption" and in particular, "no preretirement mortality" affects the basic cost computation which is now prescribed by law. Unless I am overlooking some printed word (a realistic possibility), there does not appear to be any small plan exceptions, such as in the IRS proposed 2008 mortality regulation. What are actuaries planning to do in respect of small plans under PPA? I would suspicion this question falls under the category of "don't ask."

We have discussed the effect ultimately PPA will have on lump sums and employers are making, but waiting to implement, lump sum decisions based upon generalities rather than specifically in respect of 2008. Most of the plans I service provide for the plan year stability period and 5 month lookback so we can plan for next years' distributions, which is especially valuable when terminating a plan. I explain to my clients that life has changed and actuaries no longer can make pension projections with any degree of confidence. Then, they ask all of the questions you posed at which time I say "I don't know" and offer my appreciation if they would shoot the messinger.

I often wondered what constitutes a half month. If a Plan Year ends January 31, is 8 1/2 months October 15 or October 16. I suspect your question may be addressed in some early EA meeting "Grey Book."

The employer will need to amend the Plan to adopt the PPA basis as a minimum. At such time, the Plan may specify the pre-PPA basis as the standard basis. If later, the sponsor wants to amend the Plan so that the PPA basis becomes "the" lump sum basis, it would appear the Pre-PPA basis would have to be preserved in respect of benefits accrued as of the change date. So, the Plan would distribute the greater of the lump sum value of the accrued benefit at time of change using the pre-PPA basis or the lump sum of the total accrued benefit using the post-PPA basis. The pre-PPA basis calculation would tend to wear away qucikly for employees continuing to accrued benefits.

Yes, I lay out the usual parameters: Substantial sustained contributions should be anticipated. This is not stop-and-go and there is limited flexibility: We do not discuss the abilitity to amend the plan to control contributions other than if there is a crisis business condition that would warrant a permanent change. There may be qualification issues if the plan is terminated too soon. Make the pension plan your most convervative investment element of your portfolio to avoid overfunding. If this doesn't fit the (small client's) objectives, then suggest a more flexible arrangement. And they all nod affirmatively. Then, all this being said, in the most controlled of laboratory environments, organisms do what they damn well please. I have determined a guaranteed method for controlling these situations: I'm not engaging any more one-person or small professional plans. But, would suggest you don't try this at home unless your home is paid for.

Thank you for the reference. It would appear that you could extrapolate (and you did) from this discussion that the participants who sneak into the plan after it is frozen would be excluded from the PBGC premium process. However, as you stated, this simply addresses the PBGC and not the IRS/DOL so would still have to count on 5500 and provide useless communication.

Sounds like we will now have to thumb-wrestle to determine whether or not a zero accrued benefit constitutes benefits liabilities. Note, if a Plan does not contain the deemed distribution rule and does not have a mandatory cashoout provision, terminated non-vested participants who have not incurred a one-year break in service are considered participants. In short, there is precedent for counting as participants persons who have no accrued benefits.

If I had a Plan that was going to be frozen, I would recommend the client go off prototype. Such plan is preparing for eventual termination and I would prefer to have an attoney involved even if such attorney amends the prototype changing its character to an indivdually designed plan. If the client wished to retain the prototype, that's fine. But, yes, I feel bound to follow the Plan document and if the document does not provide for exclusion of new participants, then new hires would not be excluded. All this said, while I've been the actuary for a lot of DB plans that have been frozen, I've never (I mean never) been in the position of taking over a frozen plan where the problem existed. But if I did, the situation would have to be researched to determine if there is an easy out to my fundamentalist position (such as some plan provision that may circuitously achieve the exclusion). I certainly don't pretend to speak for all actuaries; I just don't feel comfortable making up my own law.

The issue is, if not excluded, the Plan would be required to count such participant for 5500 census and pay PBGC premiums as well as include as a participant in the valuation. In addition, the Plan would need to provide all communications (SPD, SAR, etc.) While I would defer to the attorney as the one who had to defend the plan to the IRS and PBGC, I would certainly want a legal opinion that such persons were not covered if I was preparing the 5500 and PBGC forms and advising the client not to provide communications. This, indeeds, seems like a pointless issue, but clearly there are those of us who were toilet trained too early that worry about stuff like this. I can't tell you how many one-person pension plans I've terminated where before the IRS would opine on the 5310, wanted a 401(a)(26) demonstration. How pointless but I simply produce the superflous demo because otherwise the IRS cannot complete their checklist.

So long as there are attornies who have never performed an actuarial valuation, calculated a benefit, or prepared a 55500 or PBGC 1, there will always be frozen pension plans that admit new participants. Ditto, there will always be pension plans that hire employees after their normal retirement date (i.e., after age 65 and no 5 year from date of participation rule) so that the actuarial increase of their normal retirement benefit is $0. Actually, we witness the phenomenon where a participant can't retire at his/her normal retirement date. While this doesn't answer your question, it comforting to know you are observing a common problem.

What you may be able to do is obtain a waiver (similar to a power of attorney) from the client that would authroize you to push the Plan Administrator button. However, you would only do this if the Client is registered under his/her own name and you have been given the user id/password information.

My understanding is if Plan was amended at time of termination or before to adopt PPA lump sums as standard basis (superseding GATT), then may pay according to PPA. Else, would have to pay greater of GATT or PPA. This issue was addressed in ASPPA ASAP 06-38 November 15, 2006.

I only know of not-for-profits that would love to have an angel hand them $1 million ! Those not-for-profits with which I have worked for the most part are dealing with how they are going to fund their frozen DB plans.

Mr. Preston, while these IRS remedies exist, are you aware of any instances pertaining to DB plans sponsored by not-for-profit organizations where the IRS disqualified a plan because heavy contributions violated the exclusive benefit rule or if the IRS deemed compensation to be unreasonable. Are these simply remedies that the IRS might be employ if they were attacking the not-for-profit for other reasons? After all, didn't Al Capone go to jail because he had an overfunded DB (dollars burried) plan?

The Plan will dictate how to calculate the benefit, which must be fully accrued at the NRA stated in the Plan document. So, to answer your question, no proration after NRA. Where there is a generally a materially difference is benefits accrued after NRA is when the participant has not at NRA satsified the 10 years of participation requirement under 415(b).

If you look at the D-letter submission, it is unlikely you will find in the cover letter that the submitter is requesting the IRS to opine on the qualification of this particular provision. In short, if the submitter raises no issue and simply includes the provision, the IRS reviewer may not observe the "actuarial reduction" aspect.

Ooops. I have seen retirement rate assumptions for valuation purposes to continue funding. For example, for valuation purposes, changing retirement age assumption from 59 to 60, or from 65 to 70. This should not present an issue. On the other hand, "ooops" sounds impermissible, which appears to be your conclusion.

What are you seeking to accomplish? If you can clarify, you may be able to achieve without going where you're headed.

You would also have to assure that the addition of a lump sum feature does not discriminate in favor of HCEs in accordance with IRS Reg. 1.401(a)(4)-5.