mwyatt

Just performed this analysis for a client that was using a fairly ancient mortality table (post-retirement only) and 5.5% post, 7.0% pre for actuarial equivalence. Using Mike P's program, stepped through using the phase-ins for 2009 to 2012 and the year 417 mortality tables; end result was that subsidy was effectively gone (comparing DAFs for varying ages 25 to 65) by year 2012.

Flosfur, all kidding aside, the proposed regs state that for 417 recognition, you use the 08 unisex table and layer the funding assumption segment rates. Does that make sense, no, but it is what it is. As previously discussed, the more logical approach given what a yield curve actually represents v. how the IRS interpreted it in the proposed regs, would be to value the benefit @ NRD using segment rates as if NRA=AA right now, then rediscount back from NRA to AA using segment rates again. Not sure why this double dipping was disparaged as it certainly makes more logical sense if you understand what a yield curve means (i.e., the current 30 year segment doesn't imply what the short term rate will be 30 years from now, rather what 30 year maturity rates are right now). I agree, given that the funding segment rates are higher than 417 rates that you create an underfunded situation. However, has anyone actually plotted out where DAFs will be by 2012 after the phase out is done (even factoring in the 2009-2013 mortality tables). I did for a plan recently that had a fairly ancient post-retirement mortality assumption in the doc and the results were surprising, to say the least. By 2012, odds are that 417 will no longer be a significant factor for lump sums. I'll post the output once I sanitize it tomorrow.

flosfur, you're showing your (lack of) age Remember, when the GATT rates came into being at the end of '94, 30-Year Treasury yields were over 8% (so much for that revenue enhancer when the rates plummeted).

Look to the early termination regs in 1.401(a)(5) (or (8)). Don't think you could pay out in your circumstance in '08 under these regs anyway, since the threshold is 110% AFTER payment.

Hey Andy: Thanks for the input. Will try and err on the side of doing too much, although the only possible restriction that I could see that would even apply would be payment of de minimus lump sums (since plan is already frozen and lump sums aren't generally available). Guess we'll just scare them more with a SAR, PBGC Notice, and some cobbled together notice saying the plan is horribly funded (and we haven't even factored in carnage since 10/1/08). Is there any more guidance as to model notice, language out there? We'll see on the pension stuff. Think that will be the next shoe to drop in this whole financial mess. Don't think this will be a pretty 2009 for delivering reports (on the "bright" side, think the few overfunded plans I had can safely wrap up now w/o excise taxes, to say the least).

Have a small (under 100 life) collectively bargained plan. PY is 10/1-9/30. Benefits were frozen under plan as of 1/1/2007. Lump sum is not an allowable form of payment (except for de minimis under $5k payments). Optional forms are equivalent to SLA normal form, no SS offset, so no payment would exceed SLA form. Does provide for unreduced benefit for disability purposes. My reading of 436 is that it doesn't apply until PYB after 1/1/2010 in this situation. Calculated AFTAP is under 60%. What are my notification requirements?

Curious as to whether anyone has convinced a small plan client w a NRA < 62 to fork over $9,000 for the IRS ruling. What's that old law firm phrase "punitive billing"? Looks like the IRS may be trying to scare off some folks with these types of fees, especially w/ smaller plans.

Remember too that this hypothetical balance could be infinity; doesn't mean that 1) you could pay it out, or 2) that you can fund for it, but you can show it on the participant's statement. Of course, he might be curious as to when he looks at the actual dollars going in (Target Normal Cost) why there is such a discrepancy, and even more curious when he terminates and he's getting a fraction of what he was led to believe was in his hypothetical account. Thou shalt not fund for a benefit in excess of the 415 limit.

What about prior year compensation/Net Earned Income? If your document is set up to exclude compensation prior to the effective date, then your analysis is correct (BTW, why did this plan get set up with losses in the first year?). However, if it includes all compensation, then pre-effective date history is also used in determining average compensation.

Just perused the 2009 DB Answer Book which arrived at my desk this morning. Check out Q19:104; they're using 92% of FT less Assets to define shortfall amortization base. Curious...

Don't buy that line of thinking either. To paraphrase a NE coach, the 415 limit is what it is...

You know, I talked to an IRS rep at the EA meeting last spring about them doing that very thing. Our vendor sent out the files last week; will see if I can put them up here in Excel format (my eyes are long gone for entering all of that stuff by hand).

Wholeheartedly agree w/ the excess asset reallocation. Let's say that you craftily devised an actuarial basis that fit your asset model to a tee as of September 30, 2008 for example. You've now created an underfunded plan if you went with that solution...

Gary, rightly (or wrongly), think that for funding purposes the proposed regs force you to use the funding segment interest rates for your 417 assumptions, so that if you are assuming a lump sum form of payment and your plan assumptions don't factor in, the PV would be based on the 417 unisex table and the funding segment rates (although you do get the option I believe to ignore the phase in). If yoiur plan assumptions would produce a subsidy (say in your example of 94 GAR @ 5%), think you would recognize the subsidy by calculating the value of the benefit at NRA using plan assumptions then discount back based on the funding segment rate applicable to the participant's time to retirement. If 415 is an issue, then think you would cap your projected LS payment @ NRA based upon the 415 assumptions, then again discount back using the funding segment rates. As previously noted, there is a disconnect when applying the 417 rates for projection purposes in that the yield curve isn't projecting short term rates into the future but rather yields on varying maturity dates right now, which are two completely different animals. Given the "lock step" of these rates being the complete crystal ball allowed by the IRS, a more logical approach would at least be to calculate the PV @ NRD using the funding segment rates, assuming that your participant was at NRA right now, then discounting back using the segment rates (the double counting disparaged at the EA meeting, but really the logical result if you think about what a yield curve really represents). But hey, not sure that logic really factors into any of PPA anyways.

Well, since you're 5% in the PS only covers multiple plan situation (i.e., this is language provided when you have a participant in both the DB and DC plan, which plan will cover the minimum), and you specify that the person in question is not a participant in the DC plan, he gets the 2% accrual in the CB plan.

The US income is the important distinction. We had a client that had employees in a factory down in the Dominican Republic who lived and were citizens down there. They were appropriately excluded. The non-resident aliens who were living up here in MA and working, they were in the plan.

From a side standpoint, also is an interesting insight into the debate on AFTAPs for end of year valuations. Certainly 2008 will have a "material effect" on an AFTAP calculated as of the beginning of 2008/end of 2007 vs. numbers at the end of year. Of course, don't think that movement in the AFTAP is dependent on the valuation date for investment performance.

One thought is that the bond is being held under the account (forget the terminology). How about you literally holding the certificate yourself in the old file cabinet? Since the thing is worthless, shouldn't be triggering any bonding/audit issues (assuming this is a small plan). Perhaps you could use this as wallpaper along with old Pets.com stock certificates?

The pertinent stuff I see is from the proposed regs on measuring assets and liabilities, namely 1.430(d)-1(f)(iii)(B) and ©. My reading of © is that if you have a lump sum being paid using the greater of 417 and some plan AE, that you need to take into account the fact that the lump sum could be higher than calculated using 417 (which makes sense). If lump sum will only be paid using 417 rates, then you use the regular funding segment rates as your "estimate" of future 417 rates for valuation purposes. This of course begs the logical conclusion that the segment rates are reflecting a yield curve of various maturity dates, and that the current 30-year rate yield curve data point isn't the market's interpretation of what short term rates will be 30 years from now. The logical thing if you wanted a more accurate assessment at projected retirement would be to value the benefit at NRA using the segment rates, then discount that back to now using the segment rates. BWDIK...

Is this a maxed out plan? What are you putting in for actuarial assumptions? Look to the proposed asset/liability regs for lump sums subject to 415 limits. I have plans where AE is set @ 94GAR 5.5%, benefit is the 415 maximum. Comfortable within those guidelines using the PV calculated in that case @ NRD using those assumptions, and then discounting (interest only, no pre-ret mort) using the segment rates (based on conversations at the EA Dialogue meeting for small plans and the rational for ignoring pre-ret decrements in a small plan).

You of course are submitting your AFTAPs for atomic clock stamping, aren't you?

When that rule came out, I do remember the preamble stating that it was due to costs involved to the employer to perform the testing (for that matter, there was also the ability for "snapshot" testing where you just looked at say the end of the year, but used a 77% rather than 70% threshold - obviously a perfect solution for those pesky folks who terminate during the year with over 500 hours and no contribution - voila, just ignore them). Of course, felt that I would be hard pressed to justify the "extra expense" involved in tracking 1 doctor and his 3 nurses during the year to an IRS auditor as a legitimate factor in saying that the plan passed for the year.

Andy, tried to modify your suggested signature line for content. Have to find an avatar now... In all seriousness on this post, think you have to go back to the 85-86 reg changes that outlawed the "within five year of NRA exclusion" for entry to a DB plan; think a complicating thing here is the '81 termination date. Some things don't exactly make sense with respect to this issue. The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice, instead of trying to poach professional advice on the sly by trolling random message boards.

Andy, the propeller beanie avatar coupled with the disclaimer is priceless!

Looking at 436(g) New Plans, subsections b, c, and e (but not d) shall not apply to a plan for the first 5 plan years of the plan. b - shutdown benefits (probably not very applicable in any event to a small plan c - plan amendments increasing liability e - limitation on benefit accruals for plans with severe funding shortfalls. So none of these apply in the generic case. d - limitations on lump sums, but as stated probably not a concern with a one-man plan just starting up. Since 436(e) doesn't apply, don't see where a restart amendment is required or would have any effect on 404(o) funding.