SoCalActuary

The critical question on the freeze amendment is whether eligibility was also frozen. If so, no problem and no new participants. When I freeze plans, my amendments now exclude new entrants as well as benefit accruals.

You need to consult the 417 regulations on J&S benefits. If the profit sharing plan has ever held pension benefits (eg rollover from MP or DB plans) then the participant has a duty to provide the spouse with a J&S benefit. The plan has to enforce this right with valid election procedures. I suspect the result of your research will be that the normal form cannot be changed even if you have no old pension money, because you still want to allow annuity options.

However, if the value of benefits exceeds $5,000, the plan sponsor can make the participant wait till all litigation is settled before offering a single dime.

Typing in a hurry I meant the "role of ... the plan administrator"

Blinky: Yes - your professional judgement on the proper services needed to the client are the best criteria. When you takeover the plan, either stay with the prior funding method or go with the automatic approval for fully funded plans on termination if you can. Even though you are the new actuary, using the new computer system, take the position that you did not change funding methods, and be prepared to argue that as the common sense approach if audited. Pax: This works if the prior Sch B has not been filed, so it might work.

Are you eligible to change funding methods? If so, then you don't have to do something uncomfortable.

Are you working in the area of plan sponsors who are eligible for 457 plans? In the past, I have done NDCA's for businesses that were "Excess benefit defined benefit plans". In these plans, the employer agrees to supplement the regular pension for selected individuals, with the benefit a guaranteed payment based on compensation and service over a period of time after retirement. Thus it was a DB plan. Can you give more detail on your client?

Can you scream "fiduciary liability" at them? Seriously, they have now taken on roll of holding plan assets against the wishes of the newly appointed TPA. Does your lawyer need to discuss this with their lawyer? Of course, the old TPA may have a legitimate defense, such as unpaid fees, irregularities in accounts, etc.

I go back to the common sense argument: A change in funding method because you changed actuaries is unavoidable. A change in funding method because of computer systems is unavoidable. A change in type of funding method, eg Individual Aggregate or Unit Credit is not permitted unless you can use the fully funded in year of termination method. My bottom line: just do it using the prior actuary's method.

After re-reading the Rev Proc. it appears to prohibit a change in funding method in the year of takeover, unless 4.02 applies to a fully funded terminating plan. Thus, the new actuary has to comply with the old funding method and compare results with the prior valuation to see that the new actuary is within 2% (or 5% depending on software changes as well). You also get the chance to apply for a change in funding method by application, without the automatic approvals. Neither prevents the new actuary from taking over the admin. They just make the job more restrictive.

I'll check your reference as well, but... Common sense to me is: Plan sponsor decides to terminate plan. Plan sponsor does not like to do business with prior administration firm. Plan sponsor has new TPA do the administration. Assuming new TPA does it correctly, what's the problem?

I'm not in favor of boldface solicitation on this board. However, I question the pricing just given. How can any service provide individual indentity theft protection for less than minimum wage, assuming they actually take the time to hear the problems and work to correct them? Or are you talking about posted consumer financial information, which has nothing to do with the discussion about A or B and the right check?

My position is not difficult to accept. The valuation rate is applied for the plan year, even though the decision is made at the end or after the end of the year. This is not an illogical point of view, in my opinion.

This problem of handling late retirees for cross-testing is troublesome, since the solutions offered will skew the results of the test in different ways. Cash balance plans are tested as DB plans, but allocate like DC plans. Choice one is to value them at current age, using the current APR for the plan rate to convert to an annuity benefit. The annuity benefit is then tested on J&S at current age for MV benefit. Choice two is to value them using the testing age (e.g. 65) as in DC plans. How then do you determine the ages for the J&S benefit? Frankly, I don't know if the IRS has considered this fully. Can you get an opinion from Ed Burrows, Larry Deutsch, or even better from the IRS?

I've done the math both ways. Either is defendable, changing the rate at the beginning of the year for the whole year, or changing the rate at the end of the year. However..... commercial pension software cannot handle it at the end of the year.. There are no convenient mechanisms in neither Relius, ASC nor Datair to make the change at the end of the year only. Each used the valuation interest rate for preretirement funding to perform all the functions I described. For gain loss purposes, I run the val with old and then new assumptions to get the amount of gain/loss in the accrued liability when using an immediate gain method. So until my tools allow the other approach, I stand on my position.

You have a good example of an anonymous CAP submission. That allows you to tell the IRS the important facts, propose a solution (such as corrective amendments) and find out what they would do. If the client doesn't consider the correction acceptable, then you have given them written notice of the potential damages, and they can decide whether to risk an audit. As a practitioner, you should be clear about getting paid for your work, regardless of the outcome. Then you must also figure how to sell it (your work, that is) to the client.

Now we ask the affiliated service group questions: Are they providing management services to each other? Is there any significant transfer of revenue between companies? Are any of these service org's?

I disagree with the math. For an end of year valuation, the interest rate chosen is used for all purposes for the plan year, in my opinion. Thus the credit balance is brought forward at the valuation interest rate. The reconciliation account is brought forward at the valuation interest rate. The plan cost is determined at the end of the year using the valuation interest rate. The cost is discounted back to the beginning of year at the valuation interest rate. The determination of quarterly penalty is used by comparing the valuation interest rate to the 175% mid-term rate. The amortization of bases is made using the valuation interest rate, based on the balances computed at the beginning of year, brought forward with interest to the end of year with the valuation interest rate. The payment period is not changed, so the payment is re-amortized using the valuation interest rate. Can you give a cite from the IRS position to say that all these activities above are based on the prior interest rate?

The choice of mortality table deserves more discussion. The 1983 Group Annuity Table blended 50% male/female was mandated for lump sum payments from 1995 to 2001. In 2002, the table could be used, or the new 1994 Group Annuity Reserving Table, which became mandatory for lump sums and 415 limits in 2003. You calculations on a different table are interesting, perhaps for evaluation in a divorce, or for funding purposes or financial reporting. It just is not useful for lump sum valuation. How did you decide which assumptions to use, and what is the purpose of your calculation? Generally, for disclosure, the actuary picks assumptions appropriate for the purpose. For lump sums, the actuary is governed by plan documents and the appropriate 417(e) tables and interest rates. For other purposes, it depends whether an annuity will be paid. To answer your original question, the mathematics of computing annuity payments is found in many text books. Generally, you figure the probability of future payments each year, taking into account the age of the participant, gender (if it matters), the form of payment including any guaranteed payments, and any other beneficiaries. The probability tables can even be more distinct, based on the generation (year of birth) of the benefiting person. These probable future payments are discounted back to current date, using the one (or more) interest rates for discount purposes. Now, I keep mortality probabilities in a data base, import them into a spreadsheet, and apply them to the calculation needed, with the interest rates desired. (From this you could tell that I am not a civilian, but a long time actuary who still likes computer programs.)

As an alternative, consider whether the primary participant could actually retire at the NRD. Maybe you have a reasonable assumption for changing assumed retirement age if the plan sponsor cannot afford to retire when scheduled.

Wow! Did the actuary get suspended or barred from practice? A Felony conviction on the record? I work on lots of plans where I don't do the trust accounting, but rely on others to supply it. Now there's something more to wory over.

If an individual could choose between IRA or qualified plan, generally the qualified plan offers more options, including investment discretion, insurance, loans, etc. Of course, this also gives the CFP more opportunities for commission producing activity. However, the qualified plan must have a sponsor, a trust and a trustee. If the sponsor has no business activity, the IRS can question to use of the plan. Who is responsible for the document, 5500 filings, excise taxes (if any), and other issues? On the other hand, these plans are generally very easy to administer and profitable for the TPA.

I wonder if your "Bill" is the same one I encountered. It was about a decade ago, and Bill had also helped perpetrate a fraud on a pension fund by pushing for a private placement loan that never got repaid. I also suggested the client sue for malpractice, which would have been easy to win, but they were already paying too much in attorney fees. At that time, we also uncovered years of plan administration without discrimination testing, bad distribution amounts, a forged Sched B where distributions were supposedly taken and then reinstated back into the plan. Naturally, as soon as we started work, the IRS hit the client with an audit. Later, one of my clients left over personality clashes (we didn't jump fast enough), and I suggested some firms he could work with. Instead, he chose Bill, over my strenuous objections. While I warned them, they didn't care because someone else they knew endorsed Bill.

A cash balance plan is a defined benefit plan that uses a hybrid formula to define the benefit you receive. Generally, a lump sum account is determined, and the annuity benefit becomes the actuarial equivalent of the lump sum. For example, a lump sum account of $50,000 is derived as 25% of $200,000 of pay. In the following year, the $50,000 is credited with a fixed amount of interest, say 5%. The new lump sum value is $52,500 on the second anniversary. If the participant made $20,000 in pay for year two, then 25% of 20,000 = $5,000. This would be added to the 52,500, giving a new lump sum value of $57,500. At each anniversary, you would convert the lump sum value into an equivalent annuity value, using the conversion rates in the plan document. Those rates could even vary from year to year as interest rates change. With this very simplified explanation, I like cash balance plans because they provide a more stable benefit value from year to year, especially when partnerships sponsor them. They work well when two or more owners want to divide the funds in proportion to some earnings formula between themselves. In addition, they can provide very high benefits for people over age 40. Properly designed, they are less subject to surprises of pay changes or interest rates than most db plans. With that said, you should only do cash balance plans with people who have the training and experience to do them.

Some more info might help. If the alternate payee has a segregated DC account, then the participant ex-spouse already gave consent with the QDRO, IMO. The alternate payee would have to give consent unless the plan is being terminated, where you would simply buy an annuity contract if they did not consent. If the alternate payee is now re-married, the plan account might be sole & separate property, although this does not appear to affect the 417 regulations. If the alternate payee is in a pension plan with annuity options, then the current spouse (if any) could have a claim.