FAPInJax

Thanks. I could not find those cites. My eyes must be glazing over!

It is my understanding that a plan sponsor must have an 80% funding percentage to use the credit balance / pre-funding balance (whether to satisfy the minimum required contribution OR the quarterly contributions). Is the calculation of this percentage as follows: (Actuarial value of assets - pre-funding balance) / Funding target I believe that is correct but can not currently find the cite to verify it. Thanks in advance for any and all help!

What a fun time <GG>!?!?!? There were definitely more issues than resolutions. These are my takes from the meeting: 1 Pre-retirement mortality for funding is still up in the air. Regulations say MUST BUT IRS has said it depends on the method??. The issue is the valuation of the pre-retirement death benefit prior to NRD and the timing of payments with respect to the yield curve. 2 Disturbing comment of the conference from Jim Holland. The cushion amount for the maximum deduction should not recognize amendments that have occurred in the last 24 months (effectively 1/1/2008 valuation uses plan in effect 12/31/2005). This rule also applies to 415 limit as each COLA adjustment is deemed to be an amendment. Therefore, the cushion for the HCE should ONLY recognize the 2005 415 limit for an ongoing plan. 3 Quarterly contribution regulations should be out shortly (especially with 4/15 looming). The problem is that in order to use the credit balance, the client has to put in writing they want to do that BUT they can only use the credit balance IF the plan is 80% funded. 4 Pre-retirement mortality for PVABs should probably be avoided (especially in states where the issue has already been decided in district court). The IRS disagrees with the decisions (indicating that the courts do not understand that the death benefit is NOT part of the accrued benefit - even reiterated by Harlan Weller at the closing session) 5 Problem in paying lump sums if < 80% funded. No safe harbor for small amounts (maybe in Technical Corrections but for now. 6 Problem with deduction in the first year of a plan that needs to be resolved. The problem is no target liability and therefore no cushion. Therefore, minimum equals maximum. So, say minimum is 100,000 and client contributes at the end of the year requiring a contribution of 106,000 (since the contribution is discounted back to the valuation date at the effective interest rate). The problem is the deduction rules permit the deduction of the minimum (100,000) (remember there is no cushion so the maximum is the same) and therefore there is this discrepancy (same is true of the quarterlies as they currently do not appear on the Schedule SB and are not part of the minimum). 7 Good news. Top 25 restrictions still exist which would require the calculation of current liability numbers. IRS is in Grey Book as allowing a reasonable approach would be to use funding target as a replacement. I am sure that I am forgetting things but those were the biggies. Lots more regulations planned and supposedly coming up in pieces to enable administration to continue.

I am still confused so pardon me if I attempt to introduce a numerical example. Participant is 50. Retirement age is 65. There is a singular point of turnover at 60. Plan pays the greater of AE or Applicable PVAB possibilities at 60 (each of these is the PV of a monthly benefit commencing at 65) Plan AE PVAB 60,000 75,000 417(e) (using 417(e) interest & mortality) 80,000 80,000 Something (using 430 interest and 417(e) mortality 70,000 70,000 Obviously, the plan rate does not matter in the first column of numbers. However, valuing the plan as the 70,000 appears to intentionally underfund the plan (if that is the intent - although © in the proposed regulations appear to state that "for purposes of applying paragraph (f)(4)(ii)(B), the computation of the present value MUST take into account the extent to which the present value of the distribution is greater than the present value determined using the rules of paragraph (f)(4)(iii)(B) of this section". The second set of numbers has a slightly easier issue but the same basic result depending on the interpretation. One or some combination of the above is multiplied by the probability of leaving at 60 and then I believe we all agree will be discounted to 50 using PPA funding assumptions (430 interest rates and mortality). The probability of the lump sum would also be applied if necessary. Thanks for any responses.

I might consider various document options. 1 Convert the benefit at 55 to 62 and use a floor for future accrued benefits. (This is your suggestion). The formula will work and the participant may not experience any accrual for several years. 2 Another option might be to rewrite the accrual language such that the accrual if for the difference between the grandfathered converted benefit at 62 (which becomes a constant) and the projected benefit. This has the advantage of permitting continued accruals in future years but am unsure whether this type of provision is acceptable.

There are several solutions in Relius - software sent to your client so they can create a spreadsheet and send it back for import (encrypted), web solutions enabling clients to send in Excel spreadsheets for import which can be scanned for errors before they even get to you, etc. Check with the support group for more detailed information.

I did not believe that PPA permitted any offset of the quarterly contributions by credit balance / pre funding balances.

OK. So the reading of that cute paragraph would calculate the lump sum at the ages between current and normal retirement age. These would have probabilities applied against them. The result would then be discounted to current age using funding interest rates but the applicable mortality table instead of the optional small plan table (for example)

It was my understanding that IF I was valuing a lump sum for a participant that the following methodology would apply: 1 Calculate the lump sum at each age between attained age and normal retirement age using 417e assumptions 2 Multiply by the probability that the participant actually leaves at that age 3 Discount the result back to current age using funding target assumptions Is this correct OR should the first step be that the lump sum is calculated using funding target assumptions as well?? Thanks for any and all commentary.

Thanks for the 'answers'. 2. Yes. I have never heard it suggested that an amendment made before the effective date of PPA escapes the 2 year lookback. Interesting concept. Do you know where it originates from? I tried to find the origination of the 2 year lookback and it is escaping me at the moment. However, it popped up with respect to the maximum deduction of the unfunded current liability (presume therefore it is in 412(l) somewhere). My question (poorly worded as it may have been) was that the target liability and target normal cost are computed on the benefits accrued / accruing in the year for minimum funding. There is no reference (especially in the new proposed Measurment of Assets and Liabilities regulations) to not using benefits for HCEs that were attributed to amendments in the prior 24 months. This would be consistent with the prior rules where the minimum funding was permitted to recognize these benefits. However, I can not find a distinction in target liability for 404 / 430 other than the reference to the cushion not counting those benefits. 3. No opinion at this time. Have you sent Jim an email? He is very good at responding to things that he can respond to. Unfortunately, I do not have his email. If you would like to send it to me privately (or openly if you do not think it will generate a flood of emails to him) I will be glad to contact him. 4. My quick reading of the Code indicates that the quarterly addons are part of the new definition of minimum funding. If the SB doesn't include it in its current form, my guess is that will be corrected. This is the first I've heard that a portion of a required contribution might be considered non to be deductible. You'd have to point out the Code sections (or, better I should say the Code sections which aren't there that you think should be) in order for me to buy into this. I would hope they would make the change in the Schedule as you note. Thanks for all the comments.

I do not know whether any of these questions have answers (I just know the questions keep coming up): 1 There was a restriction on distributions to HCEs that involved 110% of the current liability using the highest interest rate. Is this still in effect now that current liability is not being used for funding numbers??? 2 An ongoing plan amends the formula to increase benefits in 2007. The plan is now attempting to run the 2008 PPA valuation. It appears that the target liability and normal cost are computed using the increased formula (even for the HCE). However, the cushion amount may not reflect the increase in formula for 2 years. Is this correct?? 3 I heard rumors that Mr. Holland suggested that PPA valuations could be performed without pre-retirement mortality. This appears to contradict the Measurement of Assets and Liabilities proposed regulations but I am all for it. Any truth to the statement?? 4 What happens to a plan with a quarterly penalty in 2008? The calculations are performed but the extra penalty is NOT added to the minimum contribution required (at least on the current version of the Schedule SB). Does this mean that it is no longer deductible?? Any and all answers are appreciated. Thanks in advance.

I have an additional question. A plan amends the formula to increase benefits as of 1/1/2008. It appears that the target liability and normal cost can include the amendment for funding BUT the cushion amount for the maximum may not include the amendment for the HCEs. Is my interpretation correct (subject to IRS regulations which will be forthcoming shortly <GG>)??

Interesting IRS comment: They were asked whether a plan that went below 80% and therefore invoked the rule that amendments can not be made increasing benefits could recognize the following: 415 automatic increases (going from 2008 to 2009) ANSWER NO 401(a)(17) automatice increases (going from 2008 to 2009) ANSWER NO This might alter the funding of these 1 man plans due to the limits not increasing.

A discussion similar to this occurred during one of the meetings (unrecorded of course). The general gist was that many actuaries felt 'uncomfortable' delaying a certification when the information was available.

My understanding is that you just go to the new method and do not have to grandfather the prior minimum.

So, if I understand you, a participant with a 15000 monthly benefit payable at 65 is looking for a lump sum at 55. A Determine the benefit payable at 55 using 5.5% / 417 mortality (2008 Applicable table) B Determine the benefit payable at 55 using plan assumptions C Not quite sure what this step is???? There is not a single segment rate applicable - there are 2 in this case - second segment for 10 years from 65 to 75 and then the third segment thereafter.

Designing plans is always a question of what you feel comfortable arguing with the IRS. There is really no magic to the design of a cash balance - it is pretty much open to whatever you could do for a DC plan (think of the cash balance plan as a DC plan that just happens to require actuarial certification <G>). Therefore, have a ball and do anything you wish (feel comfortable with) and the nondiscrimination testing will tell whether it works.

The IRS publishes the 20/80 interest rates in their Notices. The use of this blended interest rate with the 2008 Applicable mortality table produces the minimum lump sum (one can argue whether there is pre-retirement mortality or not - IRS says mandatory / practitioners have been using it or not depending on AE definition)

Please contact Kelly Robinson in support. We are aware of the problem and a fix exists which you do not have.

Fantastic!! Thank you very much.

The Enrolled Actuaries Report usually publishes the unrounded limits for 415 and 401(a)(17) in their winter newsletter. Does anyone know what these numbers are (generally used in FASB calculations)? Thanks in advance!

Is changing a 412i plan to a traditionally funded DB considered to be a change in funding method?

Let's for the sake of argument say the limitation year is NOT prorated.

A plan has a short year 7/1 to 12/31 and will have full calendar plan years thereafter. The actuary elects to use the unit credit funding method. The accrued benefit at the end of the period is 100 and the beginning is zero. Can the entire 100 be used in the normal cost OR must it be prorated for the short plan year? It would seem logical to fund for the 100 so assets equal liabilities at the end of the year (no gain / loss going forwards) - otherwise funding 50 would produce an immediate loss on the 1/1 valuation following. Am I missing something or is there a Revenue Ruling dealing with the short plan problem? Thanks in advance.

A peculiar question has arisen with respect to 415 lump sums. My answer was b) but wondered whether others might have the alternative opinion and why one or the other is correct. It has been my belief that the 415 maximum lump sum has nothing to do with vesting. A participant is 80% vested and his benefit is not limited by 415. However, his lump sum is limited as follows: Plan actuarial equivalence 100,000 GAR minimum floor 125,000 5.5% 415 lump sum 120,000 (assume the 105% calculation is not an issue) What lump sum is payable to the participant? a) 80% of the greater of (100,000 or 125,000) but not to exceed 120,000 100,000 b) 80% of the lesser of (120,000 or the greater of (100,000 or 125,000)) 96,000