FAPInJax

I seem to remember IRS commenting on the following situation but can not find the response. The comment was generally that IF there are NO active participants the deduction of the difference between the present value of benefits and the assets is NOT reasonable. Therefore, I will ask the learned members of this forum what they think. We will make the first case 'simple'. This is a one man plan where the participant reached normal retirement age (sometime prior to the valuation date). The valuation is performed at the beginning the plan year. Valuation 1/1/2005 Is it legal to value the participant's actuarial increased benefit and develop a contribution equal to the difference between the present value of this benefit and the assets at 1/1/2005?? Can this method be maintained when the participant does not retire but continues working and a new valuation is prepared at 1/1/2006? Is the answer any different IF there is more than 1 participant (all inactive)?? Thanks for any and all responses.

I am confusing myself with rational thoughts. A plan has calculated numbers for FASB in the past and they were: Ignoring all assumptions for the moment Projected benefit 6,000 Service at retirement 20 Therefore, let's assume the service cost will be determined from the 300 earned benefit. Let's further assume that the past service is 5 years. This produces a PBO from the 1,500 earned benefit. The actual accrued benefit is 5/20 * 4000 = 1,000. This benefit will be used for the ABO. Now, the client decides to terminate the plan. Does the PBO immediately get determined using the 1,000 benefit??? Therefore, the service cost would go to zero. That seems to make logical sense but FASB 88 is confusing me during the readings. Thanks to all for comments.

The funding method is fine - Individual Aggregate. The issue is that the owner intends to retire in 5 years and there will probably be a shortage of funds to pay the other employees their lump sum benefits. This will cause the owner to take a smaller distribution that is expected. A different funding method might help (Unit Credit) but probably the same issue arises. Actuarial assumptions could be adjusted to more accurately reflect the probability of the early termination (basically advance funding for the termination liability). Last but not least, the plan should probably not grant past service credits (creating a liability before the plan even starts) because it would just exacerbate the problem.

A client has called and said they want to establish a plan with a normal form of J&100. The benefit formula is flat at $1,000/ month. They wish to provide that if any participant terminates (married or not) that their lump sum is calculated as $1,000 times a life annuity and then discounted to attained age. This seems to be minimizing the lump sum but it sure smells funny?? Is there anything wrong legally with this?? I would think that the single participant in this case 'must' get an actuarial equivalent increase (let's say $1,200). Then the lump sums would be equal in value. A similar issue arises where a plan specifies that the benefit is paid as a 10C&L if single but J&100 if married. Doesn't this create a problem because lump sums are totally different based on marital status?? Is this the same situation?? Most of the cases I have seen have the life annuity as the normal form and all other settlement options are actuarial equivalent. Thanks for any and all responses.

I had not tried that site but have now and still have been unable to find this table. I will keep looking.

1964 Commissioners disability table that was updated in 1985 Does anyone have a copy of the original table (1964)?? How about the updated one?? I searched SOA and other areas and could not find the tables. Thanks in advance for any assistance.

The IRS said that it would be posted on their website later this week.

I think I am going blind. Would someone please point out to me where the following calculation is OK?? A participant has an accrued benefit of X which is coincidentally equal to their high 3 average compensation (which is not remotely close to the dollar limit). Can't the plan pay the lump sum value of this benefit as long as it does not exceed the lump sum of the dollar limit (using the applicable rate and mortality)?? In other words, the lump sum limit is NOT computed on the smaller of the 100% of compensation limit and the dollar limit. It is strictly computed on the dollar limit. Thanks in advance.

A client has asked the following question regarding methodology. An employer has a plan that is a life only benefit at 65 with actuarial equivalent of 5% and UP1984 (for the sake of argument). The calculation of the normal accrual EBAR is the increase in the accrued benefit (one method) divided by compensation. This does not recognize the AE assumptions versus testing assumptions (ignore the most valuable issue for the moment). Is this fair to NOT recognize (through normalizing the life benefit from plan to testing assumptions) the difference in assumptions?? Now, let's say the same employer establishes both DB and DC plans as 'carve' out groups. The DC EBARs are calculated using 8.5% testing assumptions AND the DB EBARs ignore the assumptions for normal accrual purposes (using the method above). Is this fair or even legal??? My answer was that the regulations do NOT REQUIRE the normalization when the benefit is a life annuity. The issue of the AE versus testing assumptions will be dealt with in the most valuable EBAR. There is no issue of 'fair' but what the regulations outline as the proper procedures. Any disagreements??

A participant is entitled to an accrued benefit based on top heavy rules. They have 2 years of top heavy. The participant now changes jobs and becomes an inactive participant but continues to work for the employer. It appears that under the top heavy regulations M-2 that they must receive additional top heavy years of credit as long as they get credit for a year of vesting. This is based on the reading in (b) that refers to 411(a)(4), (5) and (6). Am I reading too much into this? (other than the fact they have not been updated for umpteen years). I do not see a way to not grant the additional years of top heavy credit. Thanks in advance.

Well, there is a strict hierarchy in the allocation of assets. Basically you calculate the participants PVAB. The hierarchy is then: Voluntary contributions Mandatory contributions Benefits that were in pay status 3 years ago Basic benefits not exceed the $ limit (the 45,000 in your case) Non-forfeitable benefits Everything else There is also a limitation based on the number of years of participation (if I remember correctly). Each step must be completely funded before going to the next step. I believe it is just prorata within the step. It seems really steep to go from 151,000 to 22,000 just because of the plan termination unless the plan was WAY underfunded. PBGC should have then taken over the liabilities and gone after the employer. Maybe the drop is due to early retirement subsidies which disappear until the last step???

Surprises are all over the place. I just spoke with a lady at National IRS and asked the same basic question. However, here is the actual question posed: A plan has the following parameters: Normal retirement age 55 Actuarial equivalent Pre-retirement 8% interest and no mortality Post-retirement 5% interest and 1983 Individual Annuity Female with a 5 year setback Annuity purchase rates 62 178.4792 55 195.4910 49 207.0814 It is not necessary to calculate the maximum benefit using 415 assumptions as the pre-retirement interest rate of 8% will obviously produce a smaller benefit. A participant (current age 49) has a maximum benefit and desires to take a lump sum. How is the 415 limit determined at age 49? a) 160,000 * (178.4792 / 207.0814) * (1/1.08)^13 = 50,705.80 Reduction using the pre-retirement interest rate from 62 to 49 b) 160,000 * (178.4792 / 207.0814) * (1/1.05)^7 * (1/1.08)^6 = 61,758.80 Reduction from 62 to 55 using 5% and from 55 to 49 using 8% Amazingly enough (and I know that I can not rely on the answer) BUT the answer is (b)!! Now, this assumes that these are the early retirement actuarial equivalence factors, etc. (the same choices that were discussed earlier - whether the plan document has early retirement at all, whether the actuarial equivalent asusmptions for early retirement are the same, etc.). The rationale behind the decision is that the plan document specifically defines the actuarial equivalence assumptions PRE and POST. Therefore, everything after 55 is deemed to follow the post retirement and everything from 55 down to 49 is deemed to be pre retirement.

IF I was doing the valuation, it would definitely be a beginning of the year valuation!! This case is where there is no history of compensation to use (although I might use a rate of pay assumption to solve that issue). I need to get better at the Search (to find out prior topics like Blinky - thanks!!). I vaguely remembered asking a similar question but could not find an answer. Thanks to pax for suggesting it be included as a topic for ASPA. Maybe it might even get answered.

Very interesting! Especially, the commentary regarding that the use of zero assets violates the 80/120 rule with respect to the market value of assets. I promised to disclose my thought and it agreed with pax. However, I may rethink this position based on the above. Let's revise the facts and assume the client proceed to make a 'doctorlike' investment (in other words lost 50%). Now the assets at the end of the year are only 50,000. Does an end of the year valuation use negative assets??

I will not attempt to influence the learned people viewing this message with my opinion (until after when I will post my answer and rationale). However, the following situation is interesting (I think): Valuation 12/31/2004 Actuary assured the client that with the income they were generating and age/compensation data that a 100,000 contribution could be generated easily. Client promptly contributed on 4/1/2004 100,000. They also invested the contribution in a speculative stock that has paid dividends. The stock is already worth 200,000. What should the actuary use as assets for the valuation at 12/31/2004?? (Assuming that they do not appreciate any more by then <GGG>!) a) 200,000 minus prepaids of 100,000 b) Zero (first year of the plan) c) Something else??? Thanks for any input in advance.

The plan does NOT have an early retirement defined. The plan does NOT specifically have the 415 rates defined in the plan document.

I have seen documents that specify the 415 actuarial assumptions and the IRS has specifically ruled that it was OK (one or more clients have specifically highlighted the particular provision and asked for IRS specific review). I have not used that particular technique yet. However, I am a little confused. Revenue Ruling 98-1 Q-8 provides the rules for determining amounts subject to 417(e). This appears to be the correct question because the issue is the maximum lump sum that I can pay to a participant 49 years old with a retirement age of 55. Do we have the same issues IF we are asking how to determine the maximum 415 benefit at NRA 55? The 415 benefit is computed as the greater of the equivalent annual benefit computed using either the rates (interest and mortality) in the plan OR 5% and applicable mortality. Is this the argument which would permit the 5% rate to be applied form 62 to 55 (even though AE is defined at 8%)??

The answer to SoCal's question is that the plan does specifically provide that AE is 8% pre-retirement and 5% post-retirement. However, Blinky still believes that I am stuck with the smaller number (unless I amend the plan). Unfortunately, I feel most comfortable with the smaller number. I just wondered whether the larger result could be justified (and it can be if using NRA creates a pre/post differential). I am sure that the larger pre is designed to minimize lump sum values but it created an interesting question.

Just thought I would thank all of you for your comments and offer some finality to the discussion (at least from the government). I submitted the same question to the IRS and the answer from Paulette Tino was that of course the gain/loss for the second year is zero. The assets must be adjusted for the interest to arrive at the correct result. This then carries forward to subsequent years.

A participant wants to receive a lump sum distribution at age 49. The plan has a retirement age of 55 and provides for maximum benefits as a life annuity. The participant only has 4 years of participation as of the date of termination. The actuarial equivalent assumptions are 8% pre-retirement and 5% 1983 IAF setback 5 years post-retirement. What is the maximum lump sum that the participant can receive??? It seems obvious that the 8% AE assumption will cause that calculation to be used for the benefit. This is because you use the smaller of the AE or 5%/GAR adjusted benefits to determine the lump sum. The question is on the reductions. The benefit must be reduced from 62 to 49 and then an immediate annuity factor can be used to determine the lump sum. 160,000/12 * .4 = 5333.33 I thought the calculation would be: 5333.33 * (178.4792 / 207.0814) * (1/1.08)^13 = 1,690.19 The APRs and discount are both calculated using the AE assumptions. However, a different calculation has produced a higher limit: 5333.33 * (178.4792 / 207.0814) * (1/1.05)^7 * (1/1.08)^6 = 2,058.63 Both of these numbers could be multiplied by the annuity factor using the applicable interest rate and mortality table. I happen to like the second number better because my lump sum is 21% higher but question whether my 'explanation' would hold up. The reason is the retirement age under the plan and the pre and post interest rates for actuarial equivalent being different. Does anyone have a problem with the second calculation??

Well, I may be looking at the exceptions (for example the calculation of the gain/loss) BUT the amortization bases are also referred to 1.404(a)-14(h)(3) which states that the 'interest rate from the valuation date in the prior plan year....'. It was just questioning, when performing a valuation at the EOY, which interest rate brings the minimum funding requirement back to the beginning of the year (because of these exceptions - is this another one???)

The most valuable benefit is generally calculated by converting the account balance into a J&50 annuity payable immediately using the plan's actuarial equivalent assumptions and then back to a life annuity using testing assumptions. Does this methodology still apply IF a participant is beyond normal retirement age (testing age)?? Or can the most valuable just be determined using the plan's AE assumptions?

Thanks again! I found the same site - I knew I had seen the hard copy of something that had all these pieces of data. I just could not remember the source of the data (needless to say it is now bookmarked!!)

The 'actual' 401(a)(17) limit for 2003 was 203,180 (which was then rounded to 200,000 for purposes of benefit calculations). Is there a site where the new limit is published (the exact one) because it can be used to project FASB compensation limits?? Thanks for any and all help.

This is another end of the year valuation question. Part of the quarterly penalty calculation involves determining the minimum funding requirement at the beginning of the year. The actuary has decided to change interest rate from 5% to 7% at the 12/31/2003 valuation. The credit balance is brought forward with 5% to 12/31/2003. However, when the minimum funding requirement is determined (using the 7% interest rate) WHICH interest rate is used to bring it back to the beginning of the year?? A 5% B 7% The IRS appears to say that everything that happens prior to 12/31/2003 is at 5% and that the change does not occur until then. Thanks to any responses in advance.