flosfur

Does an actuary have a (legal/professional) responsibility to minimize or maximize a DB plan's contribution by exploring the effect of different cost methods etc? That is, can an actuary be held liable because the client did not get higher deduction which could be been attained by use of "permissible" funding method etc? Or the contribution was not minimized (and could have been), as a result of which there is a funding deficiency and the client had to file Form 5330 and pay the penalty? If an actuary does have such a responsibility, what if the client does not want to pay for the extra time & effort involved in doing so!? Has there been a case where an actuary was held responsible for not computing higher permissible / lower required contribution?

Per Rev. Rul. 81-213 (section 5.01): UAL is excess, if any, of AL over Assets. So I would say, one cannot have a negative UAL (mathematically, yes, but per IRS rules, No). In large plans I have seen actuaries actually coming up with a gain/loss during a year even though BOY & EOY UALs are -ve! I guess they did read this Rev. Rul. Personally, I have not come across a case where the UAL is negative yet the plan is not at (ERISA) FFL? I guess it can happen!

Yes. I don't see why not. A 412(i) plan is only exempt from filing Sch B & PBGC Sch A to Form 1 (variable premium), if a PBGC covered plan. In all other respects it is like any other DB plan qualified under Section 401 - minimum participation, benefit accruals, vesting, coverage (Sch T) and non-discrimination rules.

For what it's worth, Datair's system uses the same methodology i.e. converting current lump sum to QJSA etc. However, Datair's system ignores the S417(e) lump sum for this purpose. Pension222: Here is my take on this: For most (if not all) small plans, the testing assumptions are generally weaker than the plan's actuarial eq. assumptions. Thus, even without the S417(e), the lump sum is more valuable than a life annuity (testing interest has to between between 7.50% to 8.50% whereas in small plan's the interest rate for Act. Eg. is generally much lower and then there may be differences in mortality tables used). So if the testing assumptions were the same as plan's Act. Eq. assumptions and S417(e) was ignored, then there will be no need to go through this conversion computations.

Thanks Dave. Someone else pointed this out a couple of years ago but could not give me the cite for the written version of it. I would appreciate very much if someone with a copy of it would email me a copy or send me an email so I can give my fax#.

New DB plan effective 4/1/2003 with 9 month initial plan year, switching to calendar year 2nd year on. Plan sponsor is on Calendar tax year and started buisness on 4/1/2003 (hence short fiscal year also, I assume). For section 412 minimum, charges & credits are prorated for a short plan year. I could not find such a requirement (or restriction) for Section 404 maximum, which means that full NC plus net amortization of 10yr bases, if any, can be contributed & deducted! Example: Using EOY val date (12/31/03) and Ind Agg cost method, NC =$100k. S412 required = $75k. S404 Max=$100k. Any one disagree, and if so why? Thanks in advance for your response.

Two questions on 401(h) plan. 1. Can a Section 401(h) plan exist without an associated pension or annuity plan? An employer maintained a defined benefit plan with 401(h) features. The DB plan was terminated but the 401(h) is continuing? The employer is looking to change the TPA for the continuing 401(h) plan. Anyone interested in taking on the responsibility, please email me. 2. A one-man DB plan is overfunded. Can a 401(h) feature be added to the DB plan and transfer some or all of the Excess assets to the 401(h)? What is the maximum that can be transferred to the 401(h) plan? Would the answer be different if there were rank & files employees in plan?

Thanks Blinkey. That confimrs my own position.

I would vote for #1 also for the following additional reason: If the MV of plan's assets included cash & cash equivalents (money market etc) before the receivable, one would not exlude these from MV before appllying the corridor factors or would one? As stated by someone above, receivable contributions are deemed made on the last day of PY and are therefore are "cash" assets. To be consistent, if using #2, all cash & cash equivalents should also be excluded from MV before applying the corridor factors. Extending the discussion a little further .... I think the same should go for the interest & dividends recievable on stocks & bonds (bond values reported by brokers normally include accrued interest) that are ex-dividend? So usnig method #2 is not that simple apply.

A Calendar yr plan is terminating effective 8/31/2003. The valuation date is BOY (i.e. 1/1/2003) and the annual normal cost under the Ind Agg method is $100,000. Per Rev Rul 79-237, for Section 412, Charges and Credits are pro-rated from BOY to the termination date. So for the above, the minmum required would be $66,667 plus interest to EOY & late quarterly charge, if any. Is there any such pro-rating requirement for determining the deductible amount S404(a)(a)(iii) i.e. deductible = Normal Cost + 10 yr bases' charges and credits = $100k +0 = 100k. Your thoughts please.

I said previously, when there is no re-imbursement involved then these two adjustment items are blank for the "current pay period" but the "year to date" column has numbers if there ever was a claim during the current yr. I could spend hours reproducing the pay stub ... Believe it or not, the reimbursement plan works the way I described it and my spouse's ex-employer still has the plan. So let's leave it at that.

I know if it was so easy everyone would be doing it. But, again everyone does not know about "Benefits Link" and the expert advise that can be had from the experts on its message board .... Don't the companies have tuition & ducation reimbursement and scholarship programs for the employees and their children? As far as I know, the money paid out from these programs (IRC qualified, of course) is deductible by the employer and does not impute as income to the employees! Or does it? Are these programs only available to large companies or can a small company have them too? Hence posting of the question on the board. I have the Section 529 plan - but that only saves taxes on investment gains (and are relatively new), the Education IRA (I have that too) which was hardly worth the bother until 2002 - it wasn't enough to pay the tuition fee of for even a communnity college (unless one started it when the kid was born!).

I had reviewed & re-reviewed those stubs and many times. Having been an employee & a participant in a Cafeteria plan in the past, I was very surprised to see this unsual arrangement. Let me give you some actual numbers (instead of $P & $Q). One month a reimbursement claim for $230 was submitted. The pay stub after the claim was processed showed the following two additional "adjustments" to pay. Med Reimb +230.00 S125 FSA -244.50 Comparing the FICA withholding shown in this pay period's pay stub with the amounts shown in the pay stubs with no Med reimbursement involved, showed a reduction of $15.16 in the withheld FICA (6.2% of $244.50). Similarly there were reductions in the withholding for the Medicare taxes (1.45% of $244.5) and in the Federal and State Income taxes. Does this make it any clearer?

The child is mine and if the fees can be paid through the corp, I will save taxes. This way I can take lower pay and save more taxes.

How can an owner/employee of a small incoporated business pay his/her child's education expenses from the business' general fund/before tax money - estalishement of a Tuition reimbursement program? Where do I find a document for a Tuition reimbursement program?

My spouse worked for a small company (15 or so employees) which had ususual Section 125 & Medical Reimbursement arrangment (s) which operated as follows. The employee portion of the Medical, Dental and Vision insurance premium was treated as employee's deferral under Section 125 and appeared on the pay stubs as negative adjustment to gross pay as follows. S125 Med -$M S125 Den -$D Vision S125 -$V. The medical reimbursement plan would pay the medical/dental/vision expenses not covered by the insurance and worked like this. The employee was not required to make an annual election to defer the desired amount as is generally the case for a S125 plan. Instead, when an employee submitted receipts for medical expenses (not covered by insurance) for $P, say, the pay stub would show the following two additional adjustments. Med Reimb +$P (addition to gross pay) S125 FSA -$Q (reduction in gross pay). where Q was slighly higher than P (can't figure out the mathematical relationship between P & Q). This has the effect of reducing income, FICA and other taxes. The FICA and Medicare taxes would reduce by 6.2% & 1.45% of $Q, which indicates that the positive adjustment of $P to the pay did not affect the FICA (and other) taxes, yet the negative adjustment of $Q "did affect the taxes". The claims were submitted to a TPA who would then advise the payroll service of the adjustments to be made (i.e. it was not done by the employer's in house staff). We never got to find out what would have happened if the amount claimed far exceeded the periodic gross pay - say claim of $2,500 Vs semi-monthly gross pay of $1,500? How does this work and what are the relevant Code sections providing for such arrangement as I would like to utilize this for my personal use (a small incorporated company in the pension plan industry). Where can I get a plan document for such arrangement?

Precisely What? Do the Regs or Code explicitly prohibit applying S415 limit before the accrual fraction and if so, where? That's what I am trying to determine.

I know that - that is why one would want to limit the projected NRB to S415 before applying the fraction. And I can't find where the regs prohibit this. This may be one of the many "permissible" discrimination situations, such as the situation where someone with over 25 yrs Svc would get lower accrual rate if the denominator in the fraction is not limited to 25. If it is prohibited, then there is no great advange in using the Flat Benefit Vs Unit Credit since everyone with <=25yrs gets the same accrual % (in your example of 250%, everyone accrues 10% per year!).

That section says: an employee is "permitted" to accrue the S415 Max over a period <25, provided the plan's flat benefit determinted without regard to S415 can accrued over no less that 25yrs. So as I read it, the regs are "allowing" and are not "requiring" a faster accrual... That means, one can apply S415 before or after applying the fraction (provided, of course, the same approach is used consistently). Is this not correct? And no, there is no other restriction on selecting the option of applying S415 before multiplying by the accrual fraction.

David, thanks for your detailed input and insight. I did refuse to work on the case. My client is another TPA and the TPA did not want me to contact the actuary and also the TPA was not willing to bring the problem to the actuary's attention!? I do have a lot of takeover cases and I have had my share of problem cases including the one under consideration. I have reviewed more cases previously worked on by the same actuary and even the simplest case has nothing but problems .... a sample of which are: A person starts business on 1/1/yyyy (i.e. this is the DOH) and adopts a DB plan effective 1/1/yyyy. The actuary used EAN FIL method and somehow generated an EAN AL > 0, thus creating a base!!? How could you have a PS liability, if there is no Past Svc - I thought that was an elementary level actuarial stuff!? And this is not a one time mistake as this was the result of a "bug" in the "home grown" system used by the actuary. An employee's projected participation at NRA of 65 is 8 yrs (YOP), say. The $Max at NRA was correctly adjusted for YOP <10 & NRA <SSRA and the plan's NRB limited accordingly - e.g $8,711 at age 65 for 2001 [11,667*0.9333*8/10]. However, in computing the Fractional Accrued (based on Total YOS), the accrued benefit was not tested against the $Max limited for YOP <10, viz, after 3 YOP and with an accrual fraction of 15/20, say, the accrued benefit was computed to be 15/20 * 8,711 = $6,533 and was not limited to = 3/10 *11,667 *0.9333 =$3,267!! Again this is a systematic mistake as the "system" did not have a built in check for the Accrued Benefit vs $Max. And the problems go on and on. This is from a very highly qualified actuary and who, I am told, is very frequently hired for "professional" testimony. Using (30 minus N) yrs for amortizing the Base created by a funding method change (after Rev Proc 95-51) is a very common occurrence. It appears some actuaries stopped reading the new Rev Procs/Rev Rulings etc after they passed the exams.

PRP, Might be presumptious on my part, but .. Just in case it is not clear what Chip means by "use an interest rate of 0%", he means compute Annuity Purchase Rate for a given age at 0%. But be sure to use annual payment approach (not monthly payment) at the end of year 1, 2, 3, ....z (last age in the mortality table) - to my knowledge, this is the generally quoted life expectancy. If you want to be fancy (& more precise), add 0.5 to the number computed.

Just came across a “standardized” adoption agreement, which allows the option of applying the accrual fraction before or after applying S415 to the projected. But it states that if the latter method (applying accrual fraction after applying S415 to projected) is selected then the plan will be discriminatory under section 401(a)(4)!!? a) Is this true? If so, where does it say in the Code, Regs, IRS opinion letters…? b) I thought, in a “standardized” adoption agreement, all options were de facto non-discriminatory (as long as they were not inconsistent with other selected options)?

Mike, the funding method was changed for 2001 - 2nd year of the plan, with 29 years amortization period for S412! What am I misunderstanding here? Is there a grey area here? If there is, I would certainly like to know. As to contacting the prior actuary - do I have the nerve to accept the name calling and abusive language that may transpire as a result of the phone call? Whether the prior actuary or anyone else corrects the 2001 Sch B, the plan will have a funding deficiency!! I guess the prior actuary will be responsible for paying the 10% penalty on underfunding.

Prior actuary changed the funding method from Ind Agg to FIL and for amortizing the new base under S412 used an amortization period of 30 minus # of yrs the plan has been in effect. Apparently the actuary is way behind the times and has not read the Rev. Proc 2000-40 (or 95-51, which came out over 7 years ago), under which amortization period for new base is 10 yrs (Charge or Credit base)! The client funded the minimum required contribution computed by the prior actuary - which was grossly understated if one was to follow Rev Proc 2000-40. What is the new actuary to do? Redoing the prior yr FSA using the correct amortizaion period would produce a deficiency? Invalidating the funding mehtod change (because it did not satisfiy the conditions for an automatic approval of Rev Proc 2000-40) and reverting back to the Ind Agg cots method would make the situation worse! What can /should be done to go forward [other than not taking the case ] !?

The message which initiated this thread prompts an observation/question: Consider the flat formula: 150% of FAP reduced for YOP at NRD < 25. Consider an owner with comp of $100k and 25 YOP at NRD. Proj Ben = $100k * 150% * 25/25 = $150k and AB 5 years into the plan = $150k * 5/25 = $30k. Question: Generally, producing high(er) “accrued” benefit for an owner is of no importance since the owner generally gets what’s left in the plan after non-owners are paid out. Given this, and the fact that one cannot fund for more than 100% of Hi 3 (ignore for the moment the option of using salary scale to increase the projected for funding) wouldn’t it be better to apply the accrual fraction after applying S415 limit to the proj ben to reduce the accrued for the owner and the non-owners? In the above example, owner’s accrued after 5 yop would be: 5/25 * (150% * 100k, limited to 100k by S415’s 100% Hi 3) = $20k – no loss in reality Consider an employee with proj YOP = 25 and Comp of $30k. Applying the accrual fraction before applying S415 to the Proj ben, AB after 5 YOP would be: 5/25 *1.5 *30k = $9k. But applying the accrual fraction after applying S415 to the proj ben, AB after 5 YOP would be: 5/25 * (1.5*30k, limited to $30k by S415’s 100% Hi 3 limit) = $6k, a saving in real cost of providing benefits, namely, lump sums payable to participants. A follow up question. For the first time, just came across a “standardized” adoption agreement, which allows the option of applying the accrual fraction before or after applying S415 to the projected. But it states that if the latter method (apply accrual fraction after applying S415 to projected) is selected then the plan will be discriminatory under section 401(a)(4)!!? a) Is this true? If so, where does it say in the Code, Regs, IRS opinion letters…? b) I thought, in a “standardized” adoption agreement, all options were de facto non-discriminatory (as long as they were not inconsistent with other selected options)?