mwyatt

Who knows? Obviously, given the relative connections displayed by some members of our message community, this proposal came as somewhat of a surprise (or did it?). IMHO, nothing coming out of the Administration is as important to our economy and country as Secretary Powell's appearance at the UN tomorrow morning. The rest of this is somewhat of a sideshow at this point in time.

Well, let's not all line up to jump off the bridge just yet. Better to see what Congress does (you know, the branch of government that actually makes the law) before we start planning new careers as short-order cooks...

Actually, the ERSA proposal doesn't in of itself seem to be of the "revenue enhancement" ilk found in the 80s. The only revenue trick I see is in the LSA and RSA accounts (let's get the revenue now, and forget that we just gave away all future claims to taxation when the monies come out). In fact, the revenue estimates on p. 127 seems to indicate that there will be revenue loss to the government. If this was a revenue enhancement strategy, you would have seen cutbacks in the 415 limits I would think. If you're referencing the elimination of CT plans, I could see your disappointment (I wasn't making any comment good or bad about their existence - we do a number ourselves). Of course as an actuary, I must admit (like Mike Preston's previous comment) that I might shed a few crocodile tears over their demise while I'm handing over the DB proposal;) to the client. Actually, I was kind of wondering in my previous comment re: the standard interest rate when the SRI would move to the APR, not the other way around. I think that we're in a very different environment than was found in the late 80s with regards to prevailing rates.

Pax, thanks for the link. Always best to look at the source and not count on arithmetically challenged reporters to provide the real scoop. What is unsaid is on page 127 is the application to DB plans. Would integration (er permitted disparity, I'm showing my age) be also eliminated? Would the comp and HCE definitions also carry over to DB plans? I'm also assuming that the elimination of cross-testing would not only blast out New Comp plans but also eliminate age-based and target benefit plans. Of course this is all a proposal at this point; many, many issues on the government's plate right now that are more important than tinkering with retirement accounts...

Actually, this is an interesting comment here: "I agree the proposal does make the statement (intentional or not) that cross testing is only valid in a defined benefit arrangement." In one sense, maybe the tradeoff of testing on a benefits basis should be the guarantee of the future investment return, which a DB plan does do. In the late 90s 8.5% looked pretty conservative; now, not so sure about this. What I've been watching for is someone in Congress to reconsider the "standard interest rate" definition of 7.5%-8.5% as promulgated in the 401(a)(4) regs. When codified in the early 90's this looked reasonable. Maybe not so now (try a CT plan at 5% - doesn't look quite as appetizing).

That's what we're trying to do. I guess without resorting to arcane IRS mumbo jumbo, what one should do after further research is put the affected person in the same position as if they had never been called up. Am talking to HR to figure out a reasonable figure for the participants based on their historical hours worked (more than 2080/year) and factoring in any raises during the year. I'm assuming that erring on the side of too much is probably a better result than too little in the eyes of everyone involved. My only thought is what if leave overlaps a plan year end. would you allocate imputed contribution at plan year end while they are still out or do you wait for them to return to employment and then bump up additions at following plan year end (and I would presume earnings/losses). Fortunately in my situation, both participants were back by plan year end, but just wanted to know what we should do in that hypothetical case. Obviously the DB side is much easier to deal with as you are just talking about accrued benefit calcs, but the DC side can get a little messy since you're dealing with allocated monies as you go along.

Figured this was the best place for some help here, so I ask my fellow actuaries for some advise. Unfortunately, what we all considered a hypothetical is now emerging as a reality to many participants in plans across the country. I'm running a plain-Jane profit sharing plan with a 1,000 hour/last day of year requirement for contribution (although I think that the questions posed will also apply to accruals in DB plans). Situation is that the sponsor had two participants who were called up for service during the last plan year, although both were back by plan year end. One completed just under 1,000 HoS, the other over 1,000. My questions, after reading USERRA: 1) Think that we need to project these participants as if they were hypothetically there for full period of time (so both get contribution for year). 2) Compensation used? Do I annualize salaries actually earned as if they were there for full year? These are hourly workers. Would taking last hourly rate multiplied by 2080 be a reasonable amount to use? 3) Vesting service (1,000 Hour requirement): For first participant, if I do treat as if working over 1,000 HoS for contribution, do I also impute this service for vesting service? 4) In my situation, length of deployment occurred during plan year. For future situations, what if they came back after plan year end. My cursory reading of USERRA seems to imply that makeup contributions are made in plan year in which the participant returns to employer (so say if deployed in 2002, but comes back in 2003, makeup contribution for 2002 is taken into account in 2003, or do I make this in 2002?). Thanks for any help (and I guess these questions apply for benefit accruals in a DB plan also) as I just want to do the right thing in this situation.

I remember also back in the mid 80s doing these types of valuations (ie @ BOY but using comp during the year but assets as of the beginning of the year). We steered away from this approach as it tends to take away the advantage of doing a BOY valuation in the first place of knowing the contribution amount during the year, rather than getting a nasty surprise after the year has ended. I really don't think that your document has too much bearing here as to the definition of compensation; this is more a point of the actuarial cost method.

Actually, what are you giving up, since there is no automatic approval to change to EOY val date, and changing the val date has no impact on waiting period for any other forms of change in funding method (i.e., asset valuation, cost method, etc.). If anything, starting with EOY val date gives you flexibility in future years to change to BOY in any future year, while avoiding this compensation problem for the first year contribution in this case.

I think this is a simpler situation than is being debated. 2002 is the first year of the Plan. Run the val @ 12/31/02, taking into account salaries paid for 2002 (which would logically happen with an end of year valuation). Then, if you wish, change the funding method to beginning of year valuation in 2003 (allowed as the four-year lookback doesn't mean that the plan had to be in existence in the four years) and life goes on. Everyone's happy, and nothing untoward has been done.

Do an EOY valuation for first year as Blinky suggested (you'll come up with the same result as you have no assets yet), and then change to BOY valuation in 2003 if desired by changing the funding method. You get automatic approval on the change (remember the 4 year requirement between changes doesn't mean that the plan necessarily had to have been in effect).

Pax: You da man... sounds good to me (nice that our IRS buddies had the foresight to deal with this problem). (and I comment: I responded on logic but probably should have RTFM;) ).

Well, if you mean Social Security Retirement Age for 401(l) purposes (i.e., 65 if born 1937 or earlier, 66 if born between 1938 and 1954, and 67 if born in 1955 or later), you kind of have a problem with your definition here. person born in 1937 attains age 65 in 2002. person born in 1938 attains age 66 in 2004. Uh oh, what about 2003? So for 2003, noone attains SSRA (401(l) definition), so what level do you use? Now if using SS definition for determining SSRA, someone born in 1938 attains SSRA at 65 and 2 months. But this could be in 2003 or 2004 depending on date of birth. I think that this language didn't contemplate the subtleties inherent in the transition period. Any comments?

Same as in DC plans (i.e., capped to lesser of 50k and 50% of vested account balance - in this case present value of vested accrued benefit). You will need to focus on this to determine how much can be pulled out as loan. Repayment terms are identical.

I would say no, since you obviously qualify for 5500-EZ filing. Now, if kids enter the picture, PBGC coverage would be present unless they have ownership percentage that would qualify them as substantial owners. As an aside, this is good that your client doesn't qualify, as they sure wouldn't be getting any "coverage" from this insurance anyway. One little gotcha in the PBGC coverage is that the maximum benefit paid by PBGC for substantial owners is subject to a 30-year phase in. (Don't mean to be going into a rant, but we just closed down a 90 life plan today that was underfunded with significant premiums paid by the client over the last few years - of course underfunding was purely due to a benefit to owners of company that was well in excess of what PBGC would guaranty, never mind waivers signed by owners, so that close to 6 digit premium payment over the last 7 years was "insuring" $0 potential hit to PBGC).

Jeez, has your plan sponsor been listening to alot of oldies radio stations? Haven't seen a DB plan requiring after-tax employee contributions as a condition of participation since 1984! Have they heard of that newfangled invention called a four-oh-one-kay plan?

Please: does your doctor have other employees? This is very important (and their ages matter) before anyone on this board can give you any guidance...

Well, you didn't really specify staff (if any) of client, but you did state that he needs to be putting away around $60k per year as an investment for himself. This could easily be accomplished by a DB plan (probably could at least double that amount in fact). A DC plan is only going to get you to $40k 415 maximum. Suppose you could bring in spouse and get her a contribution to total $60k, but I would think that new FICA taxes on her salary would tend to argue against that approach. Given your target of $60k, a DB is the only qualified plan structure that is going to get this for your client.

Here are a couple: What does he have for staff who would qualify for the plan? You can generally exclude part-time (i.e, under 1000 Hours per year) employees from the plan. The composition of eligilbe employees (if any) makes a big difference as to what type of plan you will want to pursue. How stable is your client's income? Generally medical/dental practices are ideal candidates for DB plans due to fairly predictable cash flow. With a 57 year old principal, you should easily be able to generate much larger contributions than possible under a DC plan (probably by a factor of 2 or 3). It all boils down to what your staff costs are before proceeding (i.e., great if you can get your dentist a huge contribution, not so great if costs for the staff put him in a position of being better off just investing after-tax money for his retirement - this applies either to DC or DB structure).

A followup here from a small plan Actuary. The mortality table under 95-6 is being replaced by 2001-62 for 415 and 417 purposes. Is there (or have I missed it) a similar shift in the 95-28 tables to the 94GAR mortality tables for purposes of the RPA '94 Current Liability and PBGC premiums?

I really don't want to start a fire storm here, but how could you possibly stop interest on the lump sum at termination. If I recall, these are defined benefit pension plans (basically a year by year career average with a continually decreasing accrual percentage). At the time of termination, one could convert the "cash balance" to an equivalent straight life annuity at NRD. Now one year later, one would assume that the SLA would be unchanged, but by not crediting interest the SLA has decreased by the assumed rate of interest. What am I missing? I also assume that one could make the case given this logic that a money purchase plan could stop crediting earnings after someone terminated employment. No wonder everyone has their arms up in the air over cash balance plans.

Thanks Pax for the reply. I have noticed the increases every year in the User Fee (what a kick in the pants in some ways as these are obviously clients in financial difficulty) and am planning on mailing the application this week. I guess that the address in 94-41 is still correct from your response (we use RIA Checkpoint and I assume that they would have posted a link to an update on the web if the address had changed). I was just checking to make sure that the address hadn't been updated since then due to all of the reorganization of the IRS (in fact is EP/EO even the department name anymore?).

Haven't done one of these for awhile; just wanted to confirm that the correct address (taken from Rev. Proc. 94-41) is still Assistant Commissioner Employee Plans and Exempt Organizations Attention: CP:E:EP:R P.O. Box 14073 Ben Franklin Station Washington, DC 20044 Also, my reading from 2002 schedule is that user fee amount is $2,200 (under 100 life plan with waiver request approx. $55,000). Can anyone confirm this address for me (just wanted to doublecheck due to all of the restructuring of the IRS). Thanks for your help.

Typically APR at Deferred Retirement Age. What does your plan say about deferred retirement benefits? Greater of benefit computed as if LRD was NRD and actuarial equivalent of benefit at NRB? If so, the benefit reflects increase for deferral already.

Being on the East Coast without any personal knowledge (which some of our other contributors clearly have) of the personalities in question, one can only comment on Firstq's inquiry as to the logic of the proposed plan of action. I think that the best thing to keep in mind is not only the beginning, but also the ending of any retirement plan. We've just finished off resolving a few plans set up pre TEFRA without paying out the excess to various government entities, thanks to enhanced EGTRRA 415 limits and (unfortunately) a rather precipitous drop in asset values. Plans set up for extremely young participants are fraught with peril (may work with historically low 30-year treasury rates at the moment, but may face overfunded status with changes to the economy and/or the 417 benchmark rate). Remember, in a DB plan you are funding for a specific amount that you are allowed to take out at "retirement". I think that we can safely assume that these structures only make sense with the benefit pegged to the maximum amount allowed under the law. But the law is a slippery slope, which can be contracted at any time. Firstq, best off to investigate the possibilities at your age of the enhanced DC limits. Check back in 10 years when the contribution under a DB plan using conservative assumptions clearly outshines what you can add under a DC plan.