SoCalActuary

You are probably OK on a fixed interest rate, so long as it does not exceed some reasonable average of market rates. For example, 5% is pretty safe because 3rd tier rates have been higher. 5.5% is pretty safe as well. 6.0% is a little closer to the lowest rate in the past 36 months (6.38% in September 07). If you were using the PBGC's 3rd tier rate, the low point had 6.07% in September 09. Meaningful benefits for a CB addition are not mentioned in any of the formal or at-microphone guidance that I have seen or heard. The only guidance is the Paul Schultz and current IRS position: whatever rate produces an accrual of 0.5% of pay as a monthly benefit at NRA. If your participants don't have at least 40% receiving this rate, then you appear to have benefits that are not meaningful, and you don't get 401(a)(26) approval.

Each year's tax is based on that year's failure to meet minimum funding. So 2007 was a failure of $100,000, tax of $10,000. 2008 was a failure of $120,000, tax of $12,000. If 2007 tax was not paid, then add on interest and penalties for failure to pay.

Commercial real estate has a market. Denny's restaurants have a long history, and are a known quantity in the market. Just don't plan for a lump sum payment within a day.

My recollection is that you discount the contribution back to 1-1-2009, reflecting the interest discount (eff + 5%) on all missed quarterly amounts, then bring forward to val date at effective rate.

You might want to read 1.401(a)(4)-8. (3) Safe harbor testing method for cash balance plans— (i) General rule. A cash balance plan is a defined benefit plan that defines benefits for each employee by reference to the employee's hypothetical account. An employee's hypothetical account is determined by reference to hypothetical allocations and interest adjustments that are analogous to actual allocations of contributions and earnings to an employee's account under a defined contribution plan. Because a cash balance plan is a defined benefit plan, whether it satisfies section 401(a)(4) with respect to the equivalent amount of contributions is generally determined under paragraphs ©(1) and ©(2) of this section. However, a cash balance plan that satisfies each of the requirements in paragraphs ©(3)(ii) through (xi) of this section is deemed to satisfy section 401(a)(4) with respect to an equivalent amount of contributions. (ii) Plan requirements in general. The plan must be an accumulation plan. The benefit formula under the plan must provide for hypothetical allocations for each employee in the plan that satisfy paragraph ©(3)(iii) of this section, and interest adjustments to these hypothetical allocations that satisfy paragraph ©(3)(iv) of this section. The benefit formula under the plan must provide that these hypothetical allocations and interest adjustments are accumulated as a hypothetical account for each employee, determined in accordance with paragraph ©(3)(v) of this section. The plan must provide that an employee's accrued benefit under the plan as of any date is an annuity that is the actuarial equivalent of the employee's projected hypothetical account as of normal retirement age, determined in accordance with paragraph ©(3)(vi) of this section. In addition, the plan must satisfy paragraphs ©(3)(vii) through (xi) of this section (to the extent applicable) regarding optional forms of benefit, past service credits, post-normal retirement age benefits, certain uniformity requirements, and changes in the plan's benefit formula, respectively. (iii) Hypothetical allocations— (A) In general. The hypothetical allocations provided under the plan's benefit formula must satisfy either paragraph ©(3)(iii)(B) or © of this section. Paragraph ©(3)(iii)(B) of this section provides a design-based safe harbor that does not require the annual comparison of hypothetical allocations under the plan. Paragraph ©(3)(iii)© of this section requires the annual comparison of hypothetical allocations. (B) Uniform hypothetical allocation formula. To satisfy this paragraph ©(3)(iii)(B), the plan's benefit formula must provide for hypothetical allocations for all employees in the plan for all plan years of amounts that would satisfy §1.401(a)(4)–2(b)(3) for each such plan year if the hypothetical allocations were the only allocations under a defined contribution plan for the employees for those plan years. Thus, the plan's benefit formula must provide for hypothetical allocations for all employees in the plan for all plan years that are the same percentage of plan year compensation or the same dollar amount. In determining whether the hypothetical allocations satisfy §1.401(a)(4)–2(b)(3), the only provisions of §1.401(a)(4)–2(b)(5) that apply are §1.401(a)(4)–2(b)(5)(ii) (section 401(l) permitted disparity, (iii) (entry dates), (vi) (certain limits on allocations), and (vii) (dollar allocation per uniform unit of service). Thus, for example, the plan's benefit formula may take permitted disparity into account in a manner allowed under §1.401(l)–2 for defined contribution plans. © Modified general test. To satisfy this paragraph ©(3)(iii)©, the plan's benefit formula must provide for hypothetical allocations for all employees in the plan for the plan year that would satisfy the general test in §1.401(a)(4)–2© for the plan year, if the hypothetical allocations were the only allocations for the employees taken into account under §1.401(a)(4)–2©(2)(ii) under a defined contribution plan for the plan year. In determining whether the hypothetical allocations satisfy §1.401(a)(4)–2©, the provisions of §1.401(a)(4)–2©(2)(iii) through (v) apply. Thus, for example, permitted disparity may be imputed under §1.401(a)(4)–2©(2)(iv) in accordance with the rules of §1.401(a)(4)–7(b) applicable to defined contribution plans. (iv) Interest adjustments to hypothetical allocations— (A) General rule. The plan benefit formula must provide that the dollar amount of the hypothetical allocation for each employee for a plan year is automatically adjusted using an interest rate that satisfies paragraph ©(3)(iv)(B) of this section, compounded no less frequently than annually, for the period that begins with a date in the plan year and that ends at normal retirement age. This requirement is not satisfied if any portion of the interest adjustments to a hypothetical allocation are contingent on the employee's satisfaction of any requirement. Thus, for example, the interest adjustments to a hypothetical allocation must be provided through normal retirement age, even though the employee terminates employment or commences benefits before that age. (B) Requirements with respect to interest rates. The interest rate must be a single interest rate specified in the plan that is the same for all employees in the plan for all plan years. The interest rate must be either a standard interest rate or a variable interest rate. If the interest rate is a variable interest rate, it must satisfy paragraph ©(3)(iv)© of this section. © Variable interest rates—(1) General rule. The plan must specify the variable interest rate, the method for determining the current value of the variable interest rate, and the period (not to exceed 1 year) for which the current value of the variable interest rate applies. Permissible variable interest rates are listed in paragraph ©(3)(iv)©(2) of this section. Permissible methods for determining the current value of the variable interest rate are provided in paragraph ©(3)(iv)©(3) of this section. (2) Permissible variable interest rates. The variable interest rate specified in the plan must be one of the following— (i) The rate on 3-month Treasury Bills, (ii) The rate on 6-month Treasury Bills, (iii) The rate on 1-year Treasury Bills, (iv) The yield on 1-year Treasury Constant Maturities, (v) The yield on 2-year Treasury Constant Maturities, (vi) The yield on 5-year Treasury Constant Maturities, (vii) The yield on 10-year Treasury Constant Maturities, (viii) The yield on 30-year Treasury Constant Maturities, or (ix) The single interest rate such that, as of a single age specified in the plan, the actuarial present value of a deferred straight life annuity of an amount commencing at the normal retirement age under the plan, calculated using that interest rate and a standard mortality table but assuming no mortality before normal retirement age, is equal to the actuarial present value, as of the single age specified in the plan, of the same annuity calculated using the section 417(e) rates applicable to distributions in excess of $25,000 (determined under §1.417(e)–1(d)), and the same mortality assumptions. (3) Current value of variable interest rate. The current value of the variable interest rate that applies for a period must be either the value of the variable interest rate determined as of a specified date in the period or the immediately preceding period, or the average of the values of the variable interest rate as of two or more specified dates during the current period or the immediately preceding period. The value as of a date of the rate on a Treasury Bill is the average auction rate for the week or month in which the date falls, as reported in the Federal Reserve Bulletin. The value as of a date of the yield on a Treasury Constant Maturity is the average yield for the week, month, or year in which the date falls, as reported in the Federal Reserve Bulletin. (The Federal Reserve Bulletin is published by the Board of Governors of the Federal Reserve System and is available from Publication Services, Mail Stop 138, Board of Governors of the Federal Reserve System, Washington DC 20551.) The plan may limit the current value of the variable interest rate to a maximum (not less than the highest standard interest rate), or a minimum (not more than the lowest standard interest rate), or both. (v) Hypothetical account— (A) Current value of hypothetical account. As of any date, the current value of an employee's hypothetical account must equal the sum of all hypothetical allocations and the respective interest adjustments to each such hypothetical allocation provided through that date for the employee under the plan's benefit formula (without regard to any interest adjustments provided under the plan's benefit formula for periods after that date). (B) Value of hypothetical account as of normal retirement age. Under paragraph ©(3)(vi) of this section, the value of an employee's hypothetical account must be determined as of normal retirement age in order to determine the employee's accrued benefit as of any date at or before normal retirement age. As of any date at or before normal retirement age, the value of an employee's hypothetical account as of normal retirement age must equal the sum of each hypothetical allocation provided through that date for the employee under the plan's benefit formula, plus the interest adjustments provided through normal retirement age on each of those hypothetical allocations for the employee under the plan's benefit formula (without regard to any hypothetical allocations that might be provided after that date under the plan's benefit formula). If the interest rate specified in the plan is a variable interest rate, the plan must specify that the determination in the preceding sentence is made by assuming that the current value of the variable interest rate for all future periods is either the current value of the variable interest rate for the current period or the average of the current values of the variable interest rate for the current period and one or more periods immediately preceding the current period (not to exceed 5 years in the aggregate).

This is one of the safe-harbor designs approved in 1.401(a)(4), and can even be better by applying DC level excess-type integration. So the CB addition would be 25% of pay plus 5.7% of pay above the TWB.

Back in the 60's and early 70's, a db plan was designed where half the benefit formula was a fixed benefit rate, and the other half was using a variable annuity method. The accrued benefit each year on the variable portion was tied to the return on plan assets for a specified portion of the trust portfolio. The return on that portfolio was compared to a benchmark 4% return. If return exceeded 4%, then the variable benefit was indexed up. If the return was lower, the variable benefit decreased. But obviously this was pre-ERISA. Now, it would be interesting if you could get more documentation on the program that you are describing.

You should also investigate the use of an IRA account with restricted payment options as provided in 401(a)(4).

The only situation where you could use the lower amount is when the participant is receiving a lump sum distribution for their entire benefit. Good luck funding the $400,000 shortfall.

Thanks so much. I wish I could refuse this work - but the decision is not mine. Thanks again. An actuary subject to the ASB rules would turn down an assignment for which they are not qualified. But if you have to do the job, make sure your E/O coverage is current. You need to learn the rules for 412(e)(3) and coverage for PBGC plans, and then you might be able to perform this job. Good luck.

Let me restate your position from the perspective of the actuary. Managing risk is easy until you actually have risk. Once the assets are invested, you have risk. But you must also consider this: PPA funding allows a range of contributions, so you usually can fund the CB plan to exactly match the pay credit. The exception is when investments just get too far outside the acceptable range.

Frequently A Total Waste of Time - hmmmm.... sounds like most of our requirements, also like a lot of legal procedures, waits in the doctor's office, and others you can fill in. The only salvation for this foolish need: you can tell the client that your billing reflects Congressional mandates. You must do it.

Jim Holland said so, repeatedly. This position is of course impossible for practical plan administration, because it forces you to look at the plan benefits based on the document provisions and limits as they would have been before the start of the second prior plan year. But, the IRS regulators don't actually care.

I saw this quote in the FreeErisa daily bulletin today.

Generally, this is best done with a cash balance plan design, where the plan investments are kept within relatively small range of volatility. The pension cost is actually a combination of: Salary, age and service are applied against plan benefit formula to produce a promised benefit. This also must consider the maximum limits under IRC 415. Promised benefit is measured in current value, separately for the portion earned in the past vs amount earned currently. Assets are compared to value of past benefits. If assets are too low (volatility in performance or moral neglect in govt plans) then you need to make up the underfunding as part of the current cost. Otherwise, the current cost is the value of the benefit being earned in the current year. So, no simple formula is exact. That's why actuaries have to make the calculations. But the closest you come to your goal is by using a cash balance formula tied to current pay.

You may have been sold the CB 101 version of how these plans work. For simplifying purposes, plan sponsors are often told that the contribution should be the "Compensation credit". When you get your second training session in CB rules, you will find that they are defined benefit plans, subject to the full range of IRC 430 rules, and IRC 404 deduction ranges. The complete answer to both of your questions is "Yes", but now you need to discuss the details with your actuary who understands the rest of the story.

Has this approach drawn questions or an audit in the past? Why should it? We are following instructions, including showing how much distribution each person is expected to receive.

You should also consider the difference in amounts between columns g and h. We typically show on g(3) the amount net of any reduction, while h shows the grand total pvab.

ret... do you determine that the death benefit is incidental because the face amount and/or level premium cost is in the proper range first? If so, then I agree.

I am sad to see that your normally useful comments are now tainted. We have had these concepts and labels around for several years now, so your observations look like instructions for tuning up a 20 year old car. My read on the incidental death benefit rules is similar to one Mike Preston published recently. One of the options was the 25% rule for plans that were not "ordinary insurance", and 50% for "ordinary" or level premium cash value policies. It was grounded in the concept of the individual level premium cost method, which is no longer a part of the funding method. The 73-407 rules were not developed to reflect a unit credit funding method, which might include current accruals or not, and which might include a past service component. Neither of those two items will produce a consistent level premium cost. It's like comparing apples and kangaroos. A plan can have target normal costs that vary widely based on compensation and plan benefit accrual patterns, such as the top-heavy formula that stops at 10 years. A plan can have wide fluctuations in past service costs based on asset values that fluctuate 20% year by year. These are not a rational basis for determining whether insurance values are incidental. The IRS needs to address this issue again with PPA in mind, but in the meantime, you should apply either the 100 times rule or the 25%/50% rate on individual level premium calculations that are not part of the required funding rules for IRC 430.

Benefit service can be disregarded. Vesting service must be retained.

For valuations performed as of the beginning of the year, or even for mid-year valuations of small plans, you do not have the factual data to know the end of year compensation. So you ask the client what their expected compensation will be for the year, and use your good judgment to determine the cost. Or, you take last year's actual compensation and make your own projection of the expected costs. As an alternative for small plans, you wait for actual end of year compensation and use asset smoothing to develop the end of year actuarial assets, giving you something very similar to using a beginning of year asset method.

One of the key points of ERISA is state preemption. Insurers are state-regulated, and the state DOI will take action in that area if an insurer fails. Now put that analogy completely out of your mind on pensions. Pensions are federally regulated, and their jurisdiction is governed by the IRS, Dept Of Labor, and usually the PBGC. In your situation, the plan sponsor might be given over to a state-regulated entity, but the pension plan could only be given over to a new trustee/administrator by Labor Dept. They have an active program for determining who should take over an "abandoned plan", and you can search the EBSA website for when and how this is done.

Looking at this from the perspective of routine funding rules, you make no assumption that the subsidized ER will be paid. Zero probability = zero cost. But you also recognize that there is a risk of this benefit being paid. Unless you assign a probability, you have nothing to measure.

Let's start with the Plan Administrator, a named fiduciary, who is responsible under civil law for providing participants their benefits. If they are unable to do so, you still have the DOL who can step in and appoint a successor plan administrator. If they just don't want to, then participants can sue them. As to the funding, a non-PBGC plan is able to pay benefits only to the extent funded. If assets are not sufficient to make employees whole, then they are allocated as the IRS prescribes - "in a non-discriminatory manner". The plan usually has no claim against the plan sponsor in BK, unless there were commingled assets.