flosfur

The PBGC wants its pound of flesh whether or not they have a liability exposure, especially now that they are strapped for cash. A plan terminated under Standard Termination on January 31, 2004. The assets have not been distributed yet. PBGC won't waive the variable premium for 2004 and won't even allow pro-rating of the variable premium based on the period from 1/1/04 thru 1/31/04 and insists on pro-rating based on the period from 1/1/04 thru the date final $ is distributed, if distributed during 2004, which could be July/August! Yet, if the plan had terminated a month before on 12/31/2003, there would have been no variable premium for 2004!

Accruals under a 412(i) plans were frozen and premiums to the insurance contract discontinued from 2003. Since the conditions of IRC 412(i) A(2) and (4) are breached by the discontinuance of prems, the plan loses its 412(i) status and hence the minimum funding rules apply - correct? If such is the case, for the first valuation (in this case for 2003), are there any restrictions on the usual actuarial parameters - valuation date, funding method and assumptions or does one treat this as a new plan (except for the accrued benefit service credits, accrued benefits and the available assets) for setting assumptions, method etc?

For what its worth ... As it happens, I just came across 2 first year valuations prepared by two different actuaries using the ASC and PenTab (now Corbel) valuation softwares. Both plans credit past service for both the projected and the accrued benefits. For both, the accrued RPA & OBRA liabiliy is zero and the benefits accruing during the year are exactly equal to the Accrued @ EOY (both are EOY valuations). I have seen the same results using the Datair system.

Sorry folks - I was going to shorten the Quote to reduce the clutter but I clicked the Add Reply instead of the Preview Post button.

To see more examples of this, see prototype adoption agreements of any one of the following: Datair, PenDocs, The New England Financial & MassMutual. I don't have these on the computer so I cannot post it here without typing in the Questions & the answer boxes available for all of them. But as an example, here is what the Datair's "Standardized" (non-Integrated) Prototype has: Part II C 4. Average Compensation - S1.2.7 provides that a. Average Annual Comp b. Average Monthly Comp is based upon the comp which yields the highest average received during: c. Plan Provisions - the 3 Consecutive Years of Service while a Participant. d. any ____ Consecutive years (minimum of 3) e. ______ years (min.. 3 ) of the last ___ years. f. the final ____ years (min.. 3) g. all years (career average). h. annual (current) comp (applies only to a accumulation plans). C 5. Counting of Average Annual (or Monthly) Comp - Include compensation received during: a. Years odf Service b. Years of Service while a participant. Exclude compensation received: (Select all applicable.) choices are: In the year: NRA is attained, NRA is attined and the ____ years prior to NRA, in which participant fails to earn a Year of Credited Service, break in svc, of participant's termination and so on. D 8. Limits on Credited Service: ... a. include all years with the employer b. include years while a participant. c. disregard years prior to __/___/___ d. ... disregard years in excess of ____. Note: Must exclude years prior to fives years before the effective date of the benefit formula and cannot limit the number of years less than 25. Note: (relates to 412(i) plans) .............. _________________________________________ The less than 36 months (or any other averaging period) issue is addressed in the Basic document. I do not see any Warning or Caution about using the same service for benefit service credits & comp averaging.

I know it was a non-question but someone had raised the question and before I emphatically say "no" I wanted to check out for the "just in case" .....

The plan can have rank & file employees and still be exempt from PBGC's coverage if the sposor is a "professional service employer" - see ERISA 4021©(2) for lsit of professions. But don't stop there. Some professions not listed there can still be "professional service" but one has write to the PBGC to get a determination. Examples of professions not listed but have received the "professional service" exemptions are: Pharmacists, Enrolled Agents, (non-performing) artists, actors...

As stated in my post, an employee enters 1/1 & 7/1 coincident with or following eligibility is met. Which part of the TH vesting rules? Are you referring to the participant having 2 yrs of service for vesting?

If the fraction at point 0 (plan effective date, with no participation) is 1/10th, then is the fraction 2/10th at the end of year 1?

Looking for consus. A calendar year plan requires age 21 & 1 YOS for participation. Entry dates are 1/1 & 7/1 coincident/following the date the eligibility is met. An employee hired on 1/1/02 who terminates on 12/31/02 obviously will have no benefit under the plan. What about an employee hired on 7/1/02 who terminates on 06/30/03 and who has 1000 hrs credits for 2002 & 2003? I say, he does not accrue a benefit.

An observation - at the plan effective date, YOP =0, therfore if there was no prior DB plan, $Max=0 for all participants. But they may have S415 deminimis ($10k proated for service) depending on whether or not the sponsor has (or had) a DC plan. So PVAB @ plan effective date would pretty limited.

Andy, all the prototype (standard & non-standard) and volume submitter documents I have ever seen and worked with don't prohibit using Service for benefit formula & Avg Comp during participation or alternatively using Partipation for benefit formula & Avg Comp during Employment. You can't get anymore Safe-Harbor than a Standarized Prototype document provisions?

Both the Projected and the Accrued benefits are based on service.

A plan's benefits are based on Service using average comp during "Participation". Since avg comp on the plan's effective date is zero, would it be correct (or reasonable) to say that on the plan's effective date the accrued benefits, PVABs and the Current Liability etc are all zero?

The terminology on line 14 of 5300 (line 12 on 5307) has always left me pondering.... 1. Are there any "non-design" based safe harbors? Aren't all safe harbors design based? What would be an example of such a non-design based safe harbor? 2. Isn't a safe harbor plan by definition "nondiscriminatory"? Why make the distinction of Design-based Safe and Design-based "nondiscrimination" Safe? 3. Other than the permitted disparity integrated formulas, what would be an example of a design-based "nondiscriminatory safe" harbor formula?

Thanks.

This plan never had NHCEs. Is there a problem with changing the YOP definition when the plan is being terminated?

Generally, the YOP for S415 is the same as the YOP defined for a plan. Is there a problem with defining a YOP >= 100 hours of credited service in a PY? What's the minimum hours one can use - is 1 hour ok? A plan has excess assets which are increasing by leaps and bound by the week, so the plan needs to be terminated ASAP. Termination will take place within less than 2 months into the new plan yr. All participants have <= 5 YOP and increasing the participation, even by 1 yr, would obviously would be very beneficial. Currently a YOP is >=1000 hrs during a PY.

Thanks.

Insurance products have surrender penalties and mutual funds have redemption charges. Mutual funds' account statements don't show redemption charges, if any, (at least, I don't remember seeing them) but insurance products' statements generally do. Generally (from what I have seen) , current market value of ins products = Cash surrender value. Yet, the value of mutual fund's units are not reduced by redemption charges (I have not, yet, seen it done). Any thoughts on this. Reason for the question: I am looking at a statement of variable annuity which is invested in mutual funds. The statement shows a current surrender penality, which is about 5% of the mutual funds' value. The variable annuity is the plan's only asset. What is plan's assets market value for funding - surrender value or the accumulated value?

It is not a safe harbor plan. I know you don't agree that one can use all past service even for a non-safe harbor but for this example, assume it is permissible. Or change the scenario and limit PS to 5 yrs. In that case at the end of first year of the new DB, accrual fraction will be 6/12 giving an accrued benefit of 6/12*8,750 = $4,375, still a huge accrued benefit and PVAB after 1 YOP. If there was no prior DB, no matter how large the accrual fraction, the accrued benefit after 1 YOP cannot exceed 1/10th of the $Max. The essence of the problem is that if there is a prior DB issue, any accrual fraction > 1/10th creates a problem.

What's the latest on the proposal to change the PBGC interest rate for calculating the variable prem? Is the congress even looking at this right now? The low interest rates starting Jan 2004 is producing a variable prem for some of the plans I am working on.

A plan effective 1987 with 100% of avg comp benefit formula (no reduction for service) and fractional accrued based on participation was frozen effective 12/31/1994. Owner employee’s data @ 12/31/1994 was: YsOP = 8; Avg Comp well over 300k; Attained Age =NRA=65; Accrued Benefit = 7,920 (limited by 1994 $Max of 8/10*118,800/12). In appears, his accrued benefit has been increased with the passing years to the $Max limit for the year. The accrued benefit in the 2002 valuation was $13,333!! Q1 - Is this permissible now – with or without a plan provision to that effect? (incidentally, in 2002, the owner was 73 and his S415 $Max would have been about $25k – so I don’t know why his benefit was restricted to $13,333). There are NHCEs in the plan, some with pre 1995 entry date. The accrued benefits of the NHCEs who have pre 1995 participation, are adjusted for change in their avg comp after 1994. Even with this adjustment, the current accrued benefits of most of the NHCEs’ are Top Heavy minimum. Q2 - If the answer to Q1 is Yes, is there not a 401(a)(4) issue here?

Background: Under a previously terminated DB plan, owner employee had 10 yrs of participation and $5,000 accrued benefit payable at age 65. A new DB plan is being setup. Owner’s Hi 3 average is well in excess of $205k. For S415 purposes, the prior DB’s participation and accrued benefit is taken into account. Thus in 2004, for S415 he would have 11 years of participation (10 yrs in the prior DB and 1 yr in the current DB) and his S415 projected and accrued benefit will be $8,750 (13,750 less 5,000). At NRA he would have 30 yrs of service with 24 yrs of accrued service @ 12/31/04. Want to use non-safe harbor benefit formulas in the new DB. Formula for the owner is X% of average comp reduced for service less than 25 years. Accrual fraction is based on service. His projected and accrued benefits would be $8,750 (limited by S415) and $7,000 respectively, creating a huge PVAB and unfunded PVAB. Based on the Accrued-To-Date testing method, his accrual rate will be 1.71% [= 7,000*12/(205,000*24)]. To pass the test, the NHCEs’ accrued benefits would have to be increased substantially, further increasing the PVABs and unfunded PVABs. --------------- If there was “no prior DB plan”, we could have the following results for the owner: Projected and accrued benefit would be $13,750 and 1,375 (1/10th of projected) resulting in much lower PVAB. His accrual rate under the Accrued-To-Date would be only 0.335% and would need very low accrued benefits for the NHCEs to pass the general test. --------------------------------- Any solution to the dilemma created by a prior DB?