FAPInJax

When calculating the maximum deduction, interest may only be credited to the end of the fiscal year. However, the full funding limit is calculated at the end of the plan year. For example, a valuation date of 12/1 for a full plan year BUT the employer has a fiscal year of 12/31. IF the full funding rules do not apply, the maximum deduction can be increased by interest for the 1 month. What happens if they do apply - is there a problem because the full funding limit includes interest to the end of the plan year?? Does it have to be adjusted backwards?? Thank goodness OBRA goes away in 2004. Speaking of 2004, are we now just stuck with old full funding limit (EAN in most cases) with a floor of the RPA???

Thanks for all the responses. Always good to realize I am not totally in the dark - now where is that light switch <G>

I just had a client fax me a page from what appears to be the DB Answer Book. QA 28:19 states that for plan years beginning after 1/1/2003 that GAR 1994 is REQUIRED for RPA calculations. This is per Revenue Ruling 2001-62. I do not believe this is true based on my reading but am interested in other's opinions. I thought the ruling applied to lump sums for 415 purposes. We are still using the GAM 83 sex distinct tables (pending IRS issuance of regulations)

I have never had the IRS question the owner reducing his lump sum so the NHCE can be paid their full amount. The IRS DOES require that the valuation NOT recognize this decrease for funding purposes but the actual distribution from the plan should be fine.

Thanks for the replies. I knew there were prior threads but wanted some feedback on the actual numbers. The client has reviewed the original calculations and realize the problem with not recognizing the ARA. The subsequent gain/loss is also being reviewed.

I do not know what the old funding method was. I am just getting numbers and they did not appear to be correct from the outset. Based on Steve's comments regarding the Revenue Procedure the original bases should have been: 404 200,000 412 203,000 (the 200,000 unfunded accrued liability plus the ARA) That jives with my original thought that the original bases were off. The balance equation is being maintained using the above. Now, what about the subsequent year? There is no normal cost and the interest rate is zero (for discussion purposes only). The actual unfunded liability (per the earlier posting) is -10,000 (600000 minus assets of 610,000). However, they now have a credit balance of 30,000 and an increased ARA of 5,000. Is it then correct that the remaining outstanding bases should be equal to -10,000 plus 30,000 plus 5,000 equaling 25,000?? This would produce a gain base less than the original established base but still producing a positive result. On the other hand, the 404 base would be set equal to the remaining base causing a zero net amortization base (although the payments would not net due to the different years). Hopefully, they realized that the plan is fully funded for 404 purposes.

All numbers presented below are estimates. The methodology is the basic question behind the valuation. An actuary has decided to change funding method to unit credit. The plan does NOT have a credit balance BUT does have an accumulated reconciliation account of 3,000. The valuation produces an accrued liability of 500,000 with assets of 300,000 (unadjusted for the CB or ARA). An amortization base is established for both 404 and 412 equal to 200,000. This immediately throws the balance equation off. Doesn't the ARA have to be taken into account in the establishment of the bases??? The client uses the unfunded current liability as the maximum for this year and contributes 50,000. This produces a credit balance of 30,000. The subsequent year the assets take a huge jump so that the valuation produces an accrued liability of 600,000 with assets of 610,000. The ARA is now 5,000. The remaining balance for the Method base is: 412 (200,000 - 20,000) 180,000 404 (200,000 - 50,000) 150,000 The ARA is still being ignored (as far as I can see) because the balancing item is the credit balance. What should the gain/loss base be?? (Assuming zero interest) It does not appear to be right (at least not the way I would have approached it). Any and all comments are appreciated.

A participant in a cash balance plan continues to work past NRD. They continue to receive an allocation (theoretical) and earnings. First, they must have their NRD benefit protected with actuarial increases, correct?? Now, the testing for nondiscrimination. Is it proper to set the most valuable EBAR for this individual to the normal EBAR?? IF not, it would appear they would be subject to the same rules as everyone else - convert the increase in the accrued benefit (if using that particular method) from the normal form to a QJSA using actuarial equivalent and then convert back at testing assumptions. This would cause a different EBAR. Right?? Thanks for any and all help. The mind is a little frazzled and the regulations do not seem to reference what to do with people continuing to work after NRD.

We just had a similar discussion and believe that the initial plan IS considered the first amendment (otherwise it would be very easy to set up a plan with a huge first year deduction of the unfunded CL). It will be interesting to see if there are different points of view.

Looks like a client in need of some consulting. They must understand that the 'image' of flexibility does not exist when there is less than 10 years of funding. Pretending that the flexibility exists and paying off the past service liability over 30 years would be ludicrous. All of the above being true, there are no requirements that the client levelly (?) fund their retirement over their remaining years. Personally, I would use Individual Aggregate and adjust the benefits if necessary in the future IF reduced contributions are really needed.

A plan has provided for a contribution of 100,000 to an older owner in a cash balance. The owner is past normal retirement age at the end of the first plan year. The conversion of this contribution into an accrued benefit should be: a Contribution divided by an APR at 66 (current age) b Greater of prior accrued benefit actuarially increased or (a) This particular plan is easy because it is the first year and the beginning balance was zero. The normal accrual rate can now be determined as the benefit divided by compensation. What about the most valuable accrual rate for this individual working past NRD?? Must the balance be converted to a J&S at plan rates and converted back using testing assumptions (like a normal person) OR can the most valuable rate equal the normal accrual rate for a person past NRD. Thanks for any and all comments.

I have a plan where the participant has a NRD which is 2 months prior to his 62nd birthday (don't ask why the document is drafted like this but it is<GGG>). Question: Can an actuary perform a valuation and use age 62 (no reduction in the 415 limit) for funding purposes OR must the exact limit be used?? Obviously, the opposite problem could occur where the age 61 limit is being funded for BUT the participant is entitled to 61 5/12 (that is another issue) IF the exact limit is to be used, administratively how are others determining this? Calculate 61 and 62 limits and prorate between them Adjust the factors to compute actuarial equivalent numbers at 61 8/12 Thanks for any and all input.

Sure. I have seen it come into play when running an individual aggregate valuation and the owner is 3 years from retirement. The plan has accumulated a large credit balance (effectively eliminating the deduction under 404 for the minimum). IF his contribution is more than 50% (duh in a small plan!!) the 404 contribution is calculated with 5 years to retirement and not 3. Hope this help!

Well, I thought I had this topic down pat BUT Participant is age 66 Average compensation 75,000 8 years of service and participation Therefore, the maximum benefit under 415 is 5,000/ mo. Actuarial equivalent: 6% GATT (APR = 124.5) The GATT factors will be 4.92% and GAR94 (APR = 135.2) What is the maximum lump sum payable?? I thought the lump sum was limited to the smaller of the plan rate or GATT factors. Sorry, but my mind is just not functioning yet this morning (not enough coffee) Thanks for any and all help!

OK Blinky, before I put words in your mouth <GG>. Can it be read into your comment that you believe that for 404 purposes there is NO base to be established (as opposed to the first option which would create a negative base equal to the unfunded)??

OK. Several cups of coffee later. Doesn't 7.02 ONLY apply IF an experience loss occurs?? What if it is an experience gain and the credit balance still exists? The following data is for the current valuation. Now, assuming an experience loss (to avoid the issue of a gain) we have Accrued liability $500,000 Assets 520,000 CB 50,000 412 purposes Establish a base of $30,000 such that after subtracting the CB the result is ($20,000) which is the unfunded accrued liability. 404 purposes Establish a base of ($20,000) to maintain the equation of balance Alternatively, IF 81-213 is followed by using an actual unfunded of 0 (because of the infamous "if any" clause) then the following happens: 412 purposes Establish a base of $50,000 such that after subtracting the CB the result is 0 which is the unfunded accrued liability. 404 purposes No base is necessary Is either one "more" correct?? (other than actuaries who believe that no base should be established because the plan has a negative unfunded)

Yes. However, the practical effect should be pretty meaningless because the minimum contribution is increased but it is fully deductible.

I have a situation where for minimum funding purposes the unfunded accrued liability is not negative. HOWEVER, the unfunded accrued liability is negative for 404 purposes. The reason is a large credit balance. Is this a legal?? There is an actuary explaining that the prohibition on a negative unfunded accrued liability is for 412 ONLY. I looked at Revenue Ruling 81-213 (the one IRS always seems to reference in answer to this question) and it primarily addresses 412. Can the unfunded accrued liability be negative for 404 purposes?? Here are some numbers: Accrued liability 4,000,000 Assets 4,200,000 Credit Balance 500,000 What bases (if any) should be established for the current valuation?? The RR appears to establish a base for 412 equal to 300,000 (Section 7 of the RR). Now, for 404 is the base a negative 200,000 (maintaining the equation of balance) or zero (this is just one of those situations where the equation does not work). Thanks for any comments

Thanks for all the comments. The client is adamant that they will do it with their attorney's help. Supposedly they even have 2 pages of stuff to file with the IRS to permit a retroactive amendment fixing the situation. I repeated the 411(d)(6) argument but eventually the client is on his own (or the attorney if he is willing to stick his neck out). Thanks again!!

A client has a sole proprietor who has had a bad year(s) and does not want to make any contribution for the calendar year 2002. Unfortunately, there is no way this is going to happen with the facts. The SP and his advisor (do not know whether it is an attorney) has stated that they are willing to waive part of their accrued benefit such that a contribution will not be required. I advised the client that the waiver is great for termination to make the plan whole BUT may not be recognized for minimum funding. The SP and their advisor want a specific IRS case or cite as to why they can not use the waiver (especially because there is only one participant). The only thing I have been able to find is some very old Q&A / discussion whereby everyone agrees that it can not be done (it appears the reference is to 411(d)(6)???) Any ideas??? Thanks in advance for any commentary.

I presume that IF I had a participant who had the benefit suspension notice provided to and he happened to keep working that the initial actuarial increase would be from 70 to 71. The plan is NOT required to provide an actuarial increase from 65 to 71 for all the years suspended - correct??

Well, as usual, typing muddled the idea I was trying to get across. MGB You are correct regarding the suspension of benefits notice. Either one is required by the plan or not and it was either given or not. NOT an assumption! Thanks for comments from everyone else. A clarification: The valuation for minimum funding recognizes the 'postponed retirement' assumption and values the postponed benefit. There was a discussion on another benefits site (PIX) that this assumption could NOT be recognized for PBGC General Method purposes. The General Method required the use of the actual retirement date / age - NOT an assumption of where he might retire. PS The rest of you are correct in that the small plans have forever paid for the large plans which are severely underfunded. This is despite the attempt to use the variable rate premium to absorb some of the shortage. Maybe the variable rate should be just that, a higher rate depending on how short the plan's funding is.

You may want to consider putting a cliff vesting schedule in the plan which would eliminate the minimum distributions (no vested benefit) at least for some period of time.

A client has been presented with a valid QDRO (already determine to meet all the rules) which states that the ex will receive 50% of the participant's accrue benefit at the divorce finalization date. So the participant's accrued benefit ($1,250) was determined and the ex has 50% of it ($625). The valuation of the plan is now performed as of 1/1/2003. The valuation produces an accrued benefit for the participant of $1,625 which is reduced by $625 to reach $1,000. The normal form is 10 certain and life. What benefits are used for non-discrimination testing?? a) The gross benefit $1,625 b) The net benefit $1,000 Obviously, if testing divides by years of participation / service the EBARs could be drastically different. I am waffling BUT not leaning towards using the gross (and just accepting the fact that there is an alternate payee for $625). Now, the spouse has the benefit 'segregated' and the valuation has to determine the value. Does the spouse use the 10 certain and life but payable at the participant's NRD?? Is she entitled to begin payments at the participant's early retirement date BUT NOT receive any early retirement subsidy? (That seems to mesh into my reading). Thanks for any and all comments. I just do not do these often enough to feel comfortable.

I agree. MANY years ago, the firm I worked for required that all of our clients switch to a BOY valuation (else we found them another actuary locally). We only lost 2 clients out of about 1200. EOY valuations seem to have a problem with the data coming in late and the client desiring a different contribution level than the valuation generates. This was much easier to handle with a BOY valuation and a little consulting on our part.