FAPInJax

One thing that was not mentioned was that the DB plan could have a cliff vesting schedule. This would delay the impact of the minimum distributions (at least temporarily).

Thanks for the explanation Blinky. I guess I missed the fact that the early contribution caused the increase in the earnings. So, if we keep going with the example: FSA = 69472 + 65969 - 14559 - 874 - 150000 - 2981 - 668 = (33641) Credit balance with the last subtraction the 5 year amortization of the gain. The 50,000 contribution being made on 1/1 following the valuation. Assets at the next year end earn exactly 6% are equal to 261981 + 50000 + 18719 = 330700. Liabilities increase as expected to 1,233,198. Therefore, my actual unfunded is 902,498. However, my amortization bases are: (950,355 - 65,969) * 1.06 = 937,449 (2,981 - 668) * 1.06 = -2,452 Credit balance -33,641 Interest -2,018 899,338 This seems to create a loss in the following year equal to the gain in the previous. Where is the loss coming from since it appears that all assumptions have been recognized in both liabilities and assets? (OR is my math goofy??)

OK. Here is the data as I have been able to determine. Valuations are performed as of 12/31 of each year and the interest rate is 6%. First year (12/31/2001) EAN accrued liability 962,530 EAN normal cost 69,472 Assets 0 Initial amortization base 962,530 Contribution of 150,000 made on 1/1/2002 Credit balance 14,559 Second year (12/31/2002) EAN accrued liability 1,093,922 EAN normal cost 69,472 Assets 261,981 The assets include a contribution of 100,000 made 7/1/2002 for the plan year (2,981 interest credit for 412 purposes). The interest earned is 6% on the original 150,000 and 6% on the 100,000 from the date of the contribution. Now, the question is what the gain/loss for the year?? The actual and expected accrued liabilities are equal. What are assets actual and expected used in the determination of the gain/loss??

The funding of a 412i plan with SOLELY life insurance products is exactly what the IRS is questioning when dealing with abuses. Normally, these plans are funded with a combination of annuities and life insurance. The life insurance amounts should be calculated using one of the acceptable methods (at least from an IRS viewpoint) - multiple of monthly benefit OR some application of Revenue Ruling 74-307 to issue larger insurance amounts.

The client wants to use accrued benefit testing and the issue is truly that the plan does NOT satisfy the safe harbor rules (intentionally is my understanding). I agree that projected benefit testing would be much simpler. However, would the technique work to convert current value of the contracts each year to determine the 'accrued benefit' for that year (the increases can then be compared from year to year).

I have not been able to find any firm documentation anywhere to explain how to do this. Supposedly, a block of business is available which requires this to be done. Let's take the simple case. Normally, a DB plan will test on the change in accrued benefits from year to year (at least that is one of the testing options). However, a 412i has an accrued benefit equal to the value of the contracts used to fund the participant. Do we just convert the value to a monthly benefit and compare from year to year this way??

Thanks a bunch. Yes, these tables generally included the 1951 GAM table as the underlying mortality (although it was pretty easy to extract the turnover only and replace the mortality with whatever was desired)

Does anyone have a copy of T-10 table (Crocker, Sarason)?? (that they would be willing to share) Thanks in advance.

OK. I was trying to shortcut the data and I will put together the data to present the facts (as I know them)

I have come across what appears to be an unusual situation (however, maybe I am just not doing the calculations correctly). Client has an end of the year valuation (let's assume 12/31/2003) and has prepaid contributions during the 2003 calendar year. These contributions receive an interest credit for purposes of the FSA. Let's assume the following at 12/31/2003: Assets 100,000 Prepaid contribution 20,000 (designated for the 12/31/2003 plan year) Interest on prepaid 500 (5% interest rate and made mid-year) Funding method Entry age normal EAN accrued liability 250,000 Expected UAL 125,000 What is the gain/loss base for the current year?? My initial reaction was {250,000 - (100,000 - 20,000)} - 125,000 = 45,000 However, IF I follow my initial reaction, then in 2004 assuming that all assumptions are met, a gain/loss is created equal to 525 (the interest on the prepaid contribution plus a years interest). Given that I exactly met my assumptions this answer does not appear intuitive. OK. So I modify the gain/loss in 2003 by subtracting the interest on prepaid as well. This gives me a gain/loss of 45,500 and then in 2004 a zero gain/loss which is what I expected. The latter calculation does not seem right for 404 purposes (not recognizing the prepaid interest because it is NOT real). Comments???

OK. It has been a long day and just returned from vacation. A valuation is performed 1/1/2004 and generates a maximum deduction of 100,000. The plan is now amended to cease accruals and terminate as of 8/31/2004 (assume that all appropriate deadlines are complied with). Can the client take the full deduction because the plan year is still 12 months?? Thanks for helping a tired actuary!!

The problem is all the participants who have been going on their merry way having minimum distributions calculated once a year. They will now be required to have an annuity commencing 'immediately' (timing to coincide with the effective date of the new regulations). This could require a substantial amount of the work by the actuarial firm to establish what these monthly benefits are.

I read through the regulations and found that the account balance method is officially gone (it is even mentioned in the preamble or whatever they call it - the bottom of page 13 regarding the maintenance of the DC rules for DB plans). Interestingly enough, although they eliminated the option for most DB plans to use the DC method, it appears as though annuity contracts (albeit under an individual acoount plan - whatever that combination is) still retain the method?? Reasonable methods include anything permitted previously (in my opinion) which allows the use of the account balance method.

I have been asked a question on a 401(k) plan. A plan has 1,000 eligible employees BUT only 60 defer. Does this plan require an audit because they have over 100 eligible OR can they bypass the audit due to the limited number participating. My uninformed opinion is that the audit is required. Thanks for any and all opinions.

I attended the ASPA webcast and had several conversations with other actuaries regarding the 'benefit payout' information that is supposed to be a new disclosure. Does anyone have an idea HOW this information is supposed to be calculated?? How detailed the calculations have to be - for example a joint and survivor annuity for a retiree - possibilities abound that 'could' be valued - both alive, participant/spouse dies, both die??? The presentation appeared to imply that these calculations are NOT present values at the valuation date BUT the value in the year paid. Does anyone agree with this or disagree? Just trying to get a handle on how these calculations are to be performed since no direction was provided by FASB.

How do the new interest rates impact the calculation of the 415 limits??? Do we have separate computations for lump sums and forms of annuity?? Assume a participant is at the maximum benefit at age 62. The reduction to a monthly benefit payable at 55 is performed using (ignoring actuarial equivalent issues) 5% and GAR??? The lump sum value of this benefit is then computed using the 'new' 5.5% interest rate?? I thought the participant was entitled to the greater of the lump sum using actuarial equivalent or GAR94 and the 30 year Treasury rate. This lump sum was limited by the new lump sum limit using 5.5% for everything. I thought this was pretty clear until we had a little discussion and in rereading the regulation it is not at all clear that the 5.5% is applied for the determination of the maximum benefit BUT just for the lump sum. Any responses are appreciated.

Sorry for taking so long to clarify. Does the 105% rate apply for anything other than the option of determining the 404 contribution?? Quarterly contributions, etc. The old law had a range for RPA liability calculations and another calculation using 105% (affectionately called the RPA high interest rate). The basic question was does the RPA high interest rate exist for anything and the initial comments referred to a 404 calculation option. Anything else??

Now that the range has been reduced for to 90-100% for current liability calculations, is there any use of the 105% (the old high RPA rate)?? It seems like they left it alone and it still is used in the quarterly penalties but would like other opinions. Thanks in advance.

OK. Sorry but I have been gone. Yes, there are other participants. I believe that there is "some??" acceptance for the "assumption" of one more year of funding (at least on a beginning of the year valuation). However, it also appears that taking the difference between PVFB (monthly benefit times APR in this case) and the allocated assets constitutes pay-as-you-go funding in some minds. Mike (Preston) The assumption being a best estimate - does it matter (it would appear not to) that every 1/1 that the unfunded (allocating this participant their share of the assets) becomes the normal cost. Thanks to all for your comments to date.

A client made the last contribution last year for a participant who reached retirement in 2003. Now, the 1/1/2004 valuation is being performed and this participant is still active. Some obvious funding choices would be (method is Individual Aggregate) 1 Treat like a retiree and set assets to PVB and no further funding 2 Treat as active and assume 1 more year of funding giving appropriate formula increase and/or actuarial equivalent increase Another option being proposed is to calculate the lump sum as of the valuation date and subtract the allocated assets and fund the difference in the current year. The first 2 options I feel comfortable with but feel queasy about the additional option. Any ideas??

Yes, for discussion purposes, the reason for non-accrual is less than the requisite hours.

A participant has accrued a top heavy benefit. For 2003, the participant does NOT earn an additional year of accrual under the normal formula OR for top heavy. Are they considered benefitting??? 1.410(b)-3(a)(3)© references how a participant could not experience an increase in benefit but still be considered benefitting. Would the answer be different IF the participant had already had 10 years of top heavy service and did not earn an additional year of accrual under the formula? One more, 10 years of top heavy and he earns a year of accrual but experiences no increase in benefit because the top heavy is larger?? Thanks for any and all responses.

Wow!! The new rules being proprosed are a doozy! Conversion of cash balance plans will now require the benefits earned by the participant to be not less than that he would have earned if the conversion had not taken place. (Of course, regulations will specify how to determine all this). This, depending on the regulations, would kill conversions and just force employers to terminate their defined benefit plans. They would just install a cash balance for future purposes only (might even be generous and allow employees to increase their benefit by 'rolling' in additional monies from the old defined benefit). The other provision which is really wild is the new 'yield curve'. Better yet is that it is phased in with weighting over a 3 year period. I can't wait to see what the final result of this proposal is. Of course, they do recognize that small plans might consider this overkill, so they have opined that maybe a single rate might be more applicable in that case.

Top heavy does not necessarily have to be 3%. An allocation of equal percentage to all employees less than 3% is permitted depending on your plan document (some documents are written with the requirement of the 3%). Conclusion: Your allocation to all employees equal to .75% of compensation should be OK.

Has FASB released anything regarding the calculation of this 'expected payments' grid?? The calculations seem anything but trivial. There was a discussion on this site regarding a plan which pays lump sums. The participant had a 100,000 lump sum and a 2% probability and therefore his expected payment was 2,000. IF this same plan did NOT permit lump sums, would the expected payment be the anticipated benefit at retirement multiplied by a probability of the participant making it to retirement? Terminees and retirees pose additional problems with their guaranteed payment (10 year certain) or additional probability (participant dies and spouse is entitled to payment)??? Thanks for any and all comments.