FAPInJax

Well, your last comments about being underfunded even after the owner waives all benefits is the crux of the issue. I believe you will have a problem terminating the plan for that very reason. The plan will have to go through the entire PBGC termination rules and hopefully some of the liabilities are not PBGC liability (using the 30 year phase in, etc.). The owner can then waive all his monies. A shortage means the PBGC will come after the company for monies to take over the plan (at least that is my understanding).

The explanation was that a frozen plus future is generally treated under FASB 88. I was offered the opportunity to read that statement and IF additional questions arise to enter an additional technical request. I am attempting to put together a numerical response that hopefully will clarify the situation. I believe that their thought was that the 'ultimate' benefit was being reduced (thereby a curtailment).

Well, you guys will love this!!! FASB just returned my call and explained that this type of formula, in their opinion, is handled under FASB 88 (curtailment rules). I think I will attempt to come up with some actual numbers and present it to them again. They really had trouble understanding why a plan would ratio a prior benefit.

Thanks for the response! I was looking specifically at the examples (Q:45-46) which have a 1% per year formula and limits the attribution to the maximum number of years permitted under the formula. Q-46 then goes on to state that although the attribution is similar that gain/loss will occur after the 20 year period if experience is different than assumed. I will try giving them a call and asking for clarification.

A formula is a frozen benefit plus 1% of hi 5 compensation based on future years from the date of the freeze. The plan also ratios the average compensation to the frozen average. The following facts can be used to illustrate the issue and assumes the freeze just occurred: Frozen benefit = 1,000 Frozen compensation = 10,000 Projected compensation at NRD = 15,000 Projected pension at NRD = 2,500 The question is how to treat the frozen benefit for purposes of FASB. I believe that since it was a benefit earned in a prior period that any compensation increases would just create gain/losses. Service cost would equal 2,500 minus 1,000 * (15,000 / 10,000). This 1,000 would then be spread over the years. Likewise the PBO would be 1,000 * (15,000 / 10,000) = 1,500. Any disagreements?? Thanks for any and all comments.

The Yes/No choices are system set values. The system will determine whether the over 100 participants exist for purposes of the application of the rule. The other 2 choices Yes - override and No - override are for the user to control whether the deduction rule is implemented. The deduction is printed on the the 5th page of the Analysis report in the 404 contribution section.

Thanks for all the discussion. I agree that 1.401(a)(26)-5 would treat an employee as benefitting under (a)(26) because they are benefitting under 410(b). However, there was that weird letter that stated something along the line that despite there being an increase in accrued benefit - it had to be at least .5% (or something like that) for it to be 'meaningful'. Does that letter also apply to 410(b) then??

A participant is past normal retirement age in a plan being tested for coverage. His benefit is the actuarial equivalent increase of the prior year benefit. The coverage rules under 410(b) will deem this person to be benefitting even though there was no actual accrual increase. However, it appears that under 401(a)(26) that this person could fail to get a 1/2% increase (generating a meaningful benefit) and be deemed to NOT be benefitting under 401(a)(26). Is this a correct interpretation??

Sorry for such a dumb question. Valuation is performed at the end of the year and the RPA liability is 150,000 and assets are 100,000. The assets include a prepaid contribution of 10,000 which receives an interest credit of 700. No credit balance. The 412 FFL is 150,000 * .9 - (100,000 - 10,000 - 700) = 45,700. The 404 FFL is 150,000 * .9 - (100,000 - 10,000) = 45,000. Maximum contribution is the unfunded current liability of 150,000 - (100,000 - 10,000) = 60,000 Do these numbers appear to be correct?? Specifically, the question is regarding the inclusion of the interest on the prepaid contribution when calculating the limit for 412.

Generally speaking, accrued benefits can not be waived. They may be frozen and the plan may continue funding but they may not be reduced. The exception is upon plan termination where there are circumstances where the owners are allowed to waive benefits to make the plan whole with respect to the employees.

Well, I will take a shot! I believe the IRS is going to require that prior distributions be brought forward using the current GATT rate. This produces a current lump sum value already received. Now, compute the current 415 limit and lump sum based on the 5.5%. Subtract the prior lump sum values and that is the lump sum that he can now receive.

One question is your age?? There may be other types of plans to consider.

Normally, this calculation is performed using actuarial equivalent assumptions (at least that is the way that I was taught) to detemine the ILP normal cost. This is then multiplied by some number less than 2/3 to arrive at the maximum premium. So, for example, the projected benefit (without salary scale) would be multiplied by the AE APR and level funding from attained age would produce the initial ILP normal cost. A client is now attempting to introduce a similar concept into a 412i plan (I know this is one everyone loves <GGG>). My initial reaction was to produce the same calculations from the first paragraph using the definition in the document for AE. They would prefer to use the settlement rates of the annuity and the funding assumptions in it because it produces MUCH larger ILP normal cost and therefore more insurance. The argument is that RR 74-307 looks at 2/3 of the uninsured cost. Therefore, if an annuity was bought (using the settlement rates and accumulations in the annuity) - it would represent the uninsured cost. Any feelings?? (The RR never really referenced how to do the calculations for a DB plan from my experience. The method outlined above was derived based on the principles set forth in the RR) Thanks for any and all comments.

44 He comes up with creative ways to use the regulations (not as creative as Larry D but more palatable<GG>)

Interesting question (I think) because nothing seems to address it directly. A participant has the following compensation history: Year Salary Hours 2004 15000 1000 2003 14000 1000 2002 1000 500 2001 10000 1000 The participant did NOT receive accrual credit for the 2002 plan year and therefore the compensation is not included for benefit averaging purposes. What is their 415 compensation limit?? a) 15000 + 14000 + 1000 = 10,000.00 b) 15000 + 14000 + 10000 = 13,000.00 I was under the impression that no year of compensation is ignored for 415 purposes regardless of whether accrual credit was received. Any and all thoughts are appreciated.

This is a short plan year question. I found the other threads but they did not appear to have a definitive answer (probably because there is not one). Plan year 10/1/2004 through 12/31/2004 My thought is that the only payment date is 1/15/2005. This is 15 days after the first quarter (kind of). Alternatively, the full plan year would have been 1/1/2004 to 12/31/2004 and therefore dates of 10/15/2004 and 1/15/2005 would fall after the initial effective date. What about if the plan year was 9/1/2004 through 12/31/2004?? a) 12/15/2004 b) 10/15/2004 and 1/15/2005 Any opinions??

Thanks for all the replies. Merlin - the issue is not whether to test on benefits or contributions BUT if a participant is in 2 plans (DB / DC). The decision to test benefits or contributions is usually pretty cut and dried (not always but usually). Is there an advantage to imputing disparity in the DB versus the DC (or the other way around??)?? Can I cherry pick (or the fruit of your choice) that this employee will have imputed disparity done in the DC versus that employee in the DB?? (Assuming the 2 employees are in both plans)

Thanks for the comments about the 414s test. I had forgotten that I could just go under 401(a)(4) and test. I will have to check that option out. I guess I was wondering whether there was any 'magic' choice to decide whether to impute the disparity in the DB or the DC (provided of course that the employee is actually in both plans). A consistency requirement seems to be hidden - obviously you could not choose the highest imputed disparity for the NHCE and the lowest for the HCEs.

The compensation ratio test is required when total compensation is not used. A client has questioned whether this test is to be performed on an annual basis (for example looking at 2004 compensation) OR be performed on the testing compensation (for example the 3 year average compensation). My reading is that it is only an annual basis number. Anyone disagree?? An additional question on imputing permitted disparity. A DB and DC plan are being combined for testing purposes. Permitted disparity may only be imputed once. I can not find any rules outlining which plan must be primary (if any) or whether the maximum under either plan can be used, etc. Any comments??? I would think that using the maximum permitted disparity under either plan would be OK.

Oracle upgrades were not required as part of Version 10.0. It is expected that Version 10.1 will need the Oracle upgrade.

A client is asking a question regarding the following formula: 20% of compensation plus .65% per year (maximum of 35) of compensation in excess of covered compensation The issue is with an employee who has 40 years of service at retirement. The plan calls for fractional accrual based on service. They are being questioned on whether they can accrue the benefit over more than the 35 years. I am not aware of anything that prohibits the above formula from being accrued on a fractional basis. Am I missing something??

Thanks for the response. Pax - how do you find those cites?? Any hints?? I tried using the search capability in BenefitsLink and did not find that one at all.

A client has 21 non-excludable employees. Obviously, 40% is 8.4. Is there any rationale to enable 8 to be used (the regulation does not specify greater than, at least , etc.) when determining how many employees must be covered to pass 401(a)(26). Personally, I feel most comfortable with 9. Thanks for any and all responses.

Thanks for all the replies! So, an actuarial valuation was performed at 1/1/2003 when the participant was 64 years old (due to retire 12/1/2003) and the final contribution was determined. I gather from the responses that no one has problem here. The actuarial valuation as of 1/1/2004 finds the participant still alive and kicking BUT beyond normal retirement age. I feel comfortable making an assumption regarding his anticipated retirement date (it may be one year or several years as far as assumptions go). Assuming a single year, then funding for the actuarial increase in benefit (or the formula if larger) works just fine. The only reservation I saw was Blinky felt that if he did not retire at the end of the 2005 year then it might be a bit much to keep presuming a 1 year future assumption. The problem I ran into was that the participant is at the 415 compensation limit as of 1/1/2004 and does not project an actuarial increase. The client running the valuation is using 7% pre for funding BUT actuarial equivalent of 6%. Therefore, the valuation produces a contribution less than desired. What about just calculating the PVB at 1/1/2004 and subtracting the assets was the question?? This does not appear to be reasonable because he can not get the money out of the plan now. His benefit is not increasing and the lump sum is dropping. The plan could be amended to go to a 5.5% actuarial equivalent to get the maximum lump sum (but let's not go there at this time) SoCal has no problem with the one year funding while the person is at retirement age. What happens at 1/1/2005 (assuming the assets go down for example)?? Can the same method be employed? Can the method be maintained several years into the future - one year at a time?? I just hope to convince the gentleman to take his money and run<GGGG>.

I prefer 'Silly rabbi, kicks are for trids!'