flosfur

The S417 interest rates for a given month are contained in the IRS notices which are generally published towards the end of the month following the month for which the rates are applicable. I need to do a payout calculation now where the look back month is December 2007 but I have been unable to find the December 2007 rates. The IRS notice with the December's S417 rates won't come out untill the end of January. Where can I find these rates ahead of the IRS notice?

Yes. The IRS was going to take that away for S415 in the pre-final proposed S415 regs but the PPA negated their position by defining the average comp to be the average of comp from the employer - S415(b)(3) as amended by PPA. Going from sole prop to corp or from corp to sole prop is a continuation of the same employer.

Remedy it by making the cusion amout equal 50% of (Funding Target plus Target Nomal) with interest to EOY - as is the case now. Because the PPA is effective from 01/01/08 they put in the 150% CL less assets provision for 2006 & 2007 which was available to new plans. So why take it way from 2008 for the first plan year - for new plans, assuming non gain/loss, the deduction in the second & subsequent years goes up to about 150%+ of the first year deduction! Can you pull some strings to make it happen?

A non-safe DB provides that the TH minimum will be provided in a DC plan. The DB/DC are not aggregated for 410(b) For 401(a)(4) testing of DB, does one need to include some or all of the TH allocations into account? I don't think so.

Just want to make sure I am not missing anything. Basically, the 404 adds a cusion amount of 50% of the Funding Target (CL @ BOY) to the minimum required contribution. For a new plan without past service credits, the Funding Target and the cusion amount would be zero and the minimum/maximum would be the same. This is not in line with the current 150% of CL less Assets limit which is available to new plans. Has this been addressed by any guidance?

Just want to point out that Q&A 5 says if there was no other "DB plan" and not "any other plan" i.e. it is ok to have been covered in a DC/401k plan.

When the IRS wants a tax payer to do something it is, should I say, always because it is deterimental to the tax payer. The Rev Proc 2005-25 obviously came about because the cash surrender value (CSV) or the accumulated cash value (ACV) were, in their opinion, understating the true worth of the policies. So if the Rev Proc 2005-25 were to apply for S412/404, it would produce higher value of plan assets and hence lower contribution & deduction which the IRS' objective. On audit one might find oneself having to defend the use of CSV or ACV vis-a-vis the value determined per Rev. Proc. 2005-25! What is the defense, especially for the sprining cash value type policies!? That's what I am looking for - some solid objective defense.

This begs the question: For small plans, can one change the valuation date every year from one date to another within the plan year - 12/31 one year, 3/31 the next year, 07/01 the following year, May 15th the next year and so on...? Giving the way small plans operate, I am for the EOY valuation with hook, line & sinker! The whole idea behind the BOY valuation is for the (large plan) sponsor to prepare budget projections for the upcomig year. That is not the case in small plans as far as the pension plan expense is concerned!

You may be able to grandfather monthly benefit but that is of no consequence if the participant is eventually going to be paid in lump sum, then one is back down to the S415 limits under the new regs. I believe, the $18,750 monthly benefit and the lump sum equivalent thereof is good through 12/31/07 only. After that you are down to $17,375.

This is pathetic. I didn't even know that they are not going to send "paper renewal form" as I have not received any communication from them about it! A fellow actuary called me today (12/06) to find out if I had received the renewal form in the mail. According to him, he was under the impression that JB (for Joint Board and not "John Barleycorn") wil be mailing the form by the end of Oct. '07!

In my opinion, benefit accrual freeze is just an amendment reducing future accruals, albeit to zero, so why should there be a problem in amending the plan to increase future accruals, i.e. unfreeze the plan?

The Rev. Proc. 2005-25 clearly states:.... for purposes of applying the sections 79, 83 and 402.... There is no mention of 412 or 404! There are many other examples of code, rulings etc which apply for one purpose but not for other. The example that comes to mind immediately is the attribution rule for ownership - there are so many different sections with different rules and, obviously, they cannot be cross-inferenced. I know it is far more complicated than "that" but that's not the problem or the question here. The question is, is there a guidance on this for S412/404 calcs?

I have been using accumulated value of life insurnace policies for S412/404 calculation. I have come across cases where actuaries have used accumulated or cash surrender values. A plan with life insurance is under audit and the IRS is saying that the value of the insurance contracts should be determined in accordance with Rev. Proc. 2005-25, which outlines the methods for valuing the insurance contracts that are transferred to a partcipant etc. Is there any guidance on determining the value of life insurance contracts for S412/404 calculations? Thanks for your help.

It doesn't appear to be so. S415 mortality table is supposed to be based on the prevailing commissioners' standard table - this was not changed by PPA. The new S417 applicable mortality table under PPA is the mortality table prescribed under S430(h)(3)(A).

And what's with the annually changing Applicable and valuation mortality tables! Good God Congress, what were you thinking!

I get 143.50962, 145.60777 and 142.6593. So Andy, for the segment rates APR, we differ by the 0.07 which is too great to be acceptable to the actuaries. Just in case anyone is interested in additional checking, here are my APRs for immediate life only annuity at various ages based on 4.85%/5.02%/5.09% and 2008 Applicable Mortality. Val Age Cash Flow x APRx 55 176.8135674 56 173.8480394 57 170.8073878 58 167.6760465 59 164.4532921 60 161.1373470 61 157.7359800 62 154.2679516 63 150.7331930 64 147.1541028 65 143.5096129 66 139.8082081 67 136.0748258 68 132.2814661 69 128.4107939 70 124.4764811

I found the bug in my program - the N year certain value was being discounted back to the valuation age twice. When I developed my program a while back I only tested for life annuity without period certain. Also, I was assuming no pre-ret mortality. I am still testing my program (for life with certain period). For now, with pre-ret motality applied, monthly in advance payments (13/24 aprrox. adjustment) and interest rates of 4.85%/5.02%/5.09%, I have the following numbers: 55 => 65: 86.34255 61 => 65: 119.27845 62 => 65: 125.91942 65 => 65: 149.02968 For 55 => 65, at 4.85%, I get 89.5906, at 5% 87.2037 and at 5.09% 85.807765. I cross checked the 4.85% & 5% numbers using the the commutation functions and got the same numbers as the cash flow method.

How about doing the "sanity check" for integral ages. For current age of 61 and life annuity payment starting from 65 with 10 year certain, I come up with 121.47949290 from first principles. For 62 and 65, the factor is 130.98857426 and for 55 and 65, the factor is 77.60338758. What do you come up with for these ages?

One man-corp A has a DB plan covering the owner X with PYE 09/30. The owner X was less than 80% owner in another corp B (with 20+ employees) which has a DC Plan with PYE 12/31. X bought the remaining ownership of B thus creating a controlled group situation. The objective is to pass the coverage & nondiscrimination test by aggragting the DB/DC plans. However, reg 1.410(b)-(7)(d)(5) requires that for permissive aggregation both plans must have the same plan year! Required number of employees of corp B will be brought into the DB plan to pass 401(a)(26). One solution being considered is to change the plan year of the DB plan, say, to the calendar year. However, in the year of plan year change, the DB will have a short plan year from 10/01 to 12/31 and will not have the same plan year as the DC plan and therfore, I think, the plans cannot be aggregated for the first short year of the DB plan. Am I wrong? Any suggestions/solutions would be appreciated.

Thank you.

What is the IRS position on the (100%/150% CL minus assets) Deduction Limit for a new plan? I heard some murmurings that for this purpose the IRS considers adoption of a new plan as an amendment increasing the benefits (going from zero benefit to some benefit) and therefore this special dedcution does not apply?

The revised S415 regs (and the guidance prior to them) approach this calculation from the lump sum paid (payable) & work backward to the equivalent annual benefits. As I read the regs (and I will soon find out here if I am wrong), for benefits subject to S417(e)(3), the following steps are involved: Step 1: Compute the lump sum under the plan, which is the greater of the lump sum equivalent of the accrued benefit using the plan and the S417(e)(3) assumptions at the current age (x). Step 2: From the lump sum computed in step one, determine the equivalent annual benefit at age x using: (a) plan assumptions, (b) S415 assumptions (5.5% and applicable mortality) and © S417(e)(3) assumptions & divide the S417 benefit by 1.05. Take the greatest of the 3 equivalent annual benefits - this is the testing benefit. Step 3: Determine the S415 annual benefit at age x using the S415 assumptions (5% & applicable mortality). The annual benefit computed in Step 2 must be <= to the annual benefit computed in Step 3. If not, then the lump sum computed in Step 1 must be reduced to the extent required to bring the benefit in Step 2 down to the benefit in Step 3.

Obviously code is not clear! Why else would they devote a separate section on it in the revised S415 regs? The language in the code has not changed since the original regs, has it? The language on the annual deminimis benefit limit is no different than the annual 100% hi 3 limit or the $Max limit and therefore lump sum equivalent of $max or 100% Hi 3 should not be available!

I know this doesn't answer your question but why not make life simple and invoice the plan trustee(s) and then the trustee(s) pay the bills from the plan assets. Cut out the middle man! On the other hand, consulting fees for sponsor initiated special studies may not be payable from the plan assets as they are not "normal admin" expenses.

Is their position set out in any regs, revenue rulings etc? In my experience, hitherto, the practice in the industry has been that the lump equivalent of deminimis, where Hi 3 was less than the deminimis, was OK. I don't want to take an aggressive position and that's why I am being cautious. But at the same time I don't want to short-change the client. Also, the S415 issues involving excess assets invariably get scrutiny of second or third opinions. So I don't want the client to come back and say that my advise was bogus because another actuary said that it was Ok. That doesn't necessarily mean the other actuary is right but I better have some cite to backup my position.