SoCalActuary

This concept was discussed in December 2005 when Judy Miller was on Finance...The nature of PPA minimum funding rules and the requirement that you cannot amortize the current year accruals leads to this type of risk management. Granted that it is simpler to just use a profit sharing plan, but the cash balance plan has better guarantees for the employees. In addition, CB has much higher contribution opportunities, like the ability to contribute the entire amount of underfunding due to investment losses.

Your participant still has the right to receive their accrued benefit payable at age 58. At the point in time where the actuarial equivalent of the age 58 benefit exceeds the 415 limit, you cannot increase the monthly equivalent of the age 58 benefit. From that point forward, the participant is forfeiting their benefit, so you must give a notice of suspension of benefits. In essence, the change of the allowable age 58 benefit to the excessive age 62 benefit is a reduction in value to the participant. Further, it produces an actuarial gain because it assumes that the participant will forfeit a portion of their accrued benefit.

The benefit payable at the new assumed retirement age is equivalent in value to the benefit earned at the old assumed retirement age. Now that the person is assumed to have a new retirement age, you must adjust the prior accrued benefit to its equivalent value, and treat this as the benefit earned as of the beginning of the current year. Since this is the same benefit you already computed in your example, there is no new accrual.

Well, you are engaging a professional, who must comply with a range of complex regulations, involving finance, accounting, law, employee benefit rights, as well as probability & statistics training. This professional is governed by federal standards, and if he / she belongs to any professional organizations, is also governed by rules of conduct. There are published minimum standards for any actuarial communication, intended to document the reasonableness of assumptions and methods used. These standards include some of the content of that actuarial report you receive.

Your theory of the "intent" of the transitional rules is as good as any. However, another theory is that the transitional rules do not make anything easier. They just dampen the raw economic changes. However, the yield curve since September is most unusual, and has been dramatically different than other recession cycles.

The plan passes all the bright-line discrimination tests. QED, it does not discriminate.

Ask the old folks in any Congressional district if they believe that Medicare will not be there next year. They believe it is a lifetime promise. The SSA also makes their projections as if it will always continue. Budget whoring is not very interesting to me. Politicians do it all the time, because their definition of long-term is the next election date. California has a finely developed concept of budget whoring.

I need to be more obvious. Medicare transfers 2.9% of earned income to the govt, who pays administration and medical vendors. Congress/laws/US Govt. has made a promise of lifetime benefits to recipients, but they cannot promise the quality of those benefits. For example, there was no promise of kidney treatment in the original Medicare. They could take that away just as easily. All the Medicare bureaucracy has to do is determine that a particular type of treatment will not be reimbursed in the future. People who counted on that treatment would then be left out. The govt has the power to ration.

Don: The answer to your questions is: SS and Medicare are the world's largest ponzi schemes. Medicare is not a ponzi scheme - it is a wealth transfer to assure that our health care industry is always adequately funded. There is no guarantee of future benefits of any significant degree. SS is simply another tax & spend program, but with some window dressing to make it look like you earned a benefit that you paid for.

This is just another example of the tangential results of the big problem. The stock market prices are sensitive to profits and inflation. Profits are down. Inflation is up. Every funding problem with low asset valuation is going to respond to this fundamental economic issue. In 1999, everyone was ready to promise infinite pension benefits. In 2001, everyone was ready for the sky to fall. In 2007, we were back to irrational optimism. In 2008, the sky fell, again. Let's recognize that some people will make decisions based on what they know right now. Others will take a longer term view.

For your question, which sounds hypothetical as opposed to an immediate client problem, I say that the death benefit for your one-person plan is the full amount of assets, paid after submitting the plan to the IRS for plan termination. Meanwhile, you also have a funding problem. Further, your severely underfunded plan needs to have a freeze on benefit accruals, not just for 436. The client should not be making promises of benefits that they cannot deliver.

Andy, your scenario describes one form of chaos or entropy - if nothing is done, things stop working according to plan. If the plan sponsor can't afford the plan, then freeze the benefits. That stops the TNC. This eliminates some of the chaos you describe. If the participant dies, then the death benefit is paid, and the trust ceases to exist. Further, the plan sponsor presumably also wraps up their business affairs, and the plan is terminated because there are no beneficiaries of the plan. The chaos gets resolved. If you listen to Holland's comments, the 430 and 436 issues stop because you take action to get an FDL. Your situation reminds me of the foolish young person I know who starts an installment purchase charged to their credit card each month, like those Time-Life book offers. When the credit card gets maxed out because they could not afford the payments, the books stop coming.

My reading is that the 10/15/08 certification is valid for the 1/1/2009 plan year.

Gee, this is a really old question come back. The year of service definition for TH and for plan accrual must use the same rule, eg, elapsed time vs 1000 hours. But TH minimums under the regs are only required for years while a participant and while the plan is TH. Before the plan started, it was not deemed TH, so no TH benefit accruals are required for that period of service.

Remember this: 436 restrictions do not prevent a participant from receiving a pension. They prevent the participant from removing the employer's risk for the pension so they can be taking the risk on themselves. Some participants and some employers want to transfer that risk. Others don't. Be a good consultant, and find out which.

You did not specify whether the owners of the defunct sponsor will carry any personal liability for debts of the sponsor. You might have a situation where you don't care about the deficiency.

I agree about the tax treatment. 3405 requires the 20% withholding on rollover-eligible payments. The life annuity payments are not in that category. As to your benefit wording, it makes sense, but it certainly puts a fiduciary burden on the plan administrator and the actuary for the proper and timely execution of the AFTAP certification.

But the post said nothing about vesting issues, and 436 gives no exemption for partial termination.

Have you been playing in the lab again, young Dr. Frankenstein?

The law change is IRC 436, effective in 2008. Don't waste your client's time on suing anyone yet.

I agree with Andy. If there is a decrement that produces a zero liability, as with a termination before vesting or with a death for an unmarried participant in some plans, then the benefit for that decrement is zero.

If you want a freeze, just do it. If you want an automatic freeze, don't certify the AFTAP until 9+ months. But the lump sum exception only goes for freezes before September 2005. This does not work from your facts presented above. You have a 50% lump sum problem.

Shouldn't it be greater of lump sum under the plan & S417(e) assumptions? As far back I can remember, S417(e) rates have always produced higher lump sums! Why did the IRS decide to ignore the impact of S417(e) interest rates but not the S417(e) mortality - the variation in mortality from the 430(h) mortality has far less impact on liability than the variation in the interest rates - especially when the 417(e) rates are at 1% lower than 430(h) interest rates! There are opposing economic theories here. The IRS chose a simplified approach, sort of. The valuation interest rates are intended to match "financial economics" fair pricing. The 417(e) rates are a substitute set of fair pricing assumptions. For valuation purposes, the pricing is based on the 24 month smoothed rates. The 417(e) rates also have political issues related to cut backs, transitions from 30-yr treasury, etc. The IRS did not approve those rates for pricing of pension costs, both because they are more complex, and because they do not provide any reliable assumption of what the rates will be at the time of a future lump sum payment. But the IRS could not ignore plan rates that are obviously more valuable than any of the tiered interest rate structures available. One final point: I have seen plans that used actuarial assumptions tied to guaranteed insurance rates, which were much more expensive than 417(e) rates.

If you eliminate lump sums, then you assume that someone will be around to make the annuity payments. Further, you assume that long term investments will be managed wisely. Finally, you assume that participants want a fixed steady payment stream, instead of a flexible stream that allows for debt buydown, emergency funds, more or less risky investment strategies, etc.

That's a no-brainer. They always were.