Gary

plan defines act equiv as 7% and up84 with a 1 yr setback. for j&s payouts act equiv is 7% and up84 no setback for participant and 3 yr setback for co annuitant. no for the dilemma. say we have a participant age 65 and spuse age 60. if the pension were paid as a life annuity it would be pvab using 7% and up84(-1). say this amount is 150,000. then for a j&s, using the j&s act basis the pvab of such benefit is only 152,000. this difference is due to the different mortality tables for the different payout options. i see this as a flaw and feel that the j&s factor should be a factor that would result in the pvab of such j&s benefit to be the same as the life option. i believe that all optional forms s/b act equiv to normal form. any comments? gary

so for general post age 65 (not 415) act increases we seem to have no authoritive consensus. and as far as 1.411(B)-2 is concerned, i have not received any comment regarding its intent w/r/t post age 65 mortality. thanks for the feedback.

yes, my understanding is that for post ssra 415 calculations you do NOT use mortality for the deferral period. thanks for the feedback about the general post age 65 act increases.

1.411(B)-2 sets forth a method for computing and applying an actuarial increase for retirement after age 65, as a minimum accrual, if no suspension of benefits notice is provided. my question is s/ this act increase include a mortality assumption during the deferral period? i.e if a person retires at say age 70 (simplified for purposes of this discussion) s/ the act increase look like which one below? a) N65/N70 (with mortality) or b) (1+i)^5 * a65/a70. (without mortality) any comments? gary

i need a copy of i believe rev rul 84-45. the one that required that the discount for past earnings when computing a soc. sec benefit as part of an accd benefit, must be at least 6%. thanks, gary

the cash balance feature has been in the current plan (which includes mergers of other plans that already had a cash bal feature) since 1/1/92. they define the escalating factor based on a couple of indices (not related to 96-8), with a minimum of 4%. however they have added an ad hoc amendment to the plan every year since 1992 to have the interest credit and COLA be 8%. they also say when determining a lump sum the balance is increased at the PBGC rates (just like they use to discount the lump sum from age 65). in other words they use one definition to increase the balance when the payment is an annuity (or no increase at all) and another increase factor for a lump sum option. i don't know off hand what the indices for computing the increase factor are tied to off hand.

a cash balance plan provides in its definition of ab, that the ab be based on the cash balance at determination, divided by 200 and payable as an escalating annuity (i.e. built in cost of living adjustment) the above seems to violate 96-8, in that it appears to be a backloaded cash balance plan (i.e. no automatic interest credits to age 65). the ab also says that the age 65 benefit is based on the cash balance at current date projected to age 65, divided by 200 and payable as an escalating annuity. so there seems to be a contradiction here. in one sentence they imply that the ab is the current balance divided by 200 and payable at age 65 (but do not explicitly say this, but their participant benefit calcs support this). and in the next sentence it seems clear that it is saying that the balance is projected with interest to age 65 then divided by 200 (which would be consistent with 96-8). i see the above definition of ab as meaning that a COLA is part of the ab and when determining a lump sum it s/b part of the ab and included. the plan also says that the normal form is a 5 year c&c. the plan also says that as an optional form of payment the participant can convert the 5 yr c&c to an escalating annuity, thus implying here that the benefit is not automatically paid as an escalating annuity. or at least that the ab does not include the cola. what they do on their benefit calc is to use current balance divide by 200 (with no increse for interest) and say that s/b paid as a escalating annuity. there seems to be inconsistent language. it appears that a lump sum s/b the pvab where it is based on a 5 yr c&c with a automatic cola. any comments?

a plan had a formula where it originally computed the ab based on 1.5% of avg pay per year offset by 2/3 soc sec ben ("ssb"). this large offset was apparently violating 411(B) accruel rules. so they decided to remedy the situation by using a project and prorate ab. this railroad plan provides that if participant has over 30 years at ret. the front end and the offset would have no reduction for early commencement. my question is as follows: a person left with 6 years of svc. the person had over 30 years of projected service when computing the projected benefit. the plan is proposing that when computing the early retirement benefit that there be no reduction to the front end or the offset. my feeling is that when the person retires at say age 62, the early ret factor would be based on the fact that the person had only six years of service not based on the fact that under the project and prorate the person was projected to have over 30 years. as it turns out by having a early ret reduction results in a higher early ret benefit, since the front end was already heavily subsidized, but the offset had previously been reduced. any thoughts?

as far as i know, i still gotta believe that 411(d)(6) is always an issue to reckon with as a result of an elimination of an optional form of benefit. but there may be some leniency w/r/t certain optional forms, which i do not know offhand at this time. gary

a self employed person learned after the completion of 2001 that he is in a good position to implement a db plan for 2001. I am not sure if one needs to have a signed plan document by 12/31/2001 or a summary of the primary plan provisions in place. I have heard of some situation where having the basic plan provisions in place was sufficient. I don't know if this is that situation. Any comments or suggestions?

A plan requires ee contributions. At termination they allow for lump sums. It would appear that the lump sum would have to be at least as much as the present value of the benefit. Whether the plan bases it on the immediate or deferred benefit. Can a plan actually compute the lump sum to be the accumulated contributions plus the present value of the Er derived benefit, even if less than method stated above? I don't know that it would make sense that way. Anyone know of any cites to support thisone way or the other?

Say a plan is amended as of 1/1/87. It is clear that all benefits accrued up to that time must be protected, thus cannot be reduced. It is also clear that the assumptions and methodology for computing a lump sum must bemaintained for the accd benefit. i.e. if the lump sum were based on 1/1 pbgc rates and an immediate annuity, I presume this must be preserved, but you could use say 1/199 pbgc rates if for eg. ee recd dist in 1999. Question is can the Plan actually preserve the specific interest rate as of the date of amendment .i.e. the 1/1/87 rate in this case? In other words can they require that this rate be used, so then if the person terminates in 1999 and the rates go down, the lower rate is not required as opposed to using the lower current rate?

AndyH, Is the following correct? In terms of pension compensation for benefit accrual purposes, it is based only on what the plan says. i.e. there are no laws that would override the pension compensation definition, as long as the Plan bases its testing on an acceptable definition of compensation? In terms of testing it sounds like you can always include bonuses and o/t, but there are situations where you can exclude those forms of compensation. So as far as I can see I need to review the 414(s) regs. Do you agree? Gary

A client asked if it were common for many companies to be terminating their pensions and just keeping their 401(k) plans. My feeling is that the large companies are probably maintaining both plans, or at least convert DB to cash balance plan. And that this may be more common in mid sized companies. I also would say that it is more common than the reverse. i.e. companies terminating their 401(k) and just keeping their db plans. Any comments on these points. Also would you say that companies may eliminate early ret windows or significant subsidies in the years ahead because of the need to maintain good employees due to the fact that the baby boomers are approaching ret age and there may be a shortage in the labor force due to the demographics.

A client asked if the allowance or requirement to include overtime and/or bonuses in the definition of pension compensation was just based on the terms of the Plan or if it was a legal requirement. I said that it depends on the terms of the Plan, but that it is common if not advised to use a definition that meets the statutory requirements for plan testing purposes. My understanding is that (under 414(s)) for testing such as 415, top heavy, etc. you are not allowed to include bonuses and overtime, but for plan purposes you can include overtime and bonuses. Any thoughts?

I don't know how old you are, but it appears that they have already told you your age 65 benefit. They should have also communicated the earliest age that you can receive a pension and what that amount would be (or at least an estimate). If you don't have that information you might as well request it from the Plan administrator. If you are over age 55, I would imagine that you may very well entitled to a benefit at this time. Gary

Thanks pax. 1) The window benefit was paid in 1998. And it was computed based on a immediate annuity. So the question is, does it seem reasonable to base it on the actual age or the age in five years, in your opinion? 2) I agree w/r/t your comment about difficulty in making a Jan 2 payment. And the Plan may have intended to use the Nov pmt, but I was just curious as to how you would interpret what is actually in the Plan.

Two issues. 1. Plan provides enhanced early out. Enhancement includes an additional 5 yrs for pension accrual and for early ret factor. Plan then pays lump sum based on immediate benefit. Would one expect the lump sum to be computed based on current age (i.e. actual age) or age plus five years. Plan is not specific on this matter. 2. The lump sum interest rate used is the applicable interest rate as described in 417(e) for the month of December preceding the first day of the Plan year (cal yr) in which the distribution occurs ... Would one interpret this to mean the 30 year rate for December or the 30 rate published in December, which is thus the November rate? Or something else? The Plan is no more specific than this.

Never saw it. It seems to me that the issues in detemining a lump sum under a cash balance plan have to do with: 1. A comparison between the 30 year rate and the interest crediting rate. 2. the age 65 (normal ret) annuity conversion factor to convert balance to annuity and the age 65 present value factor under the lump sum basis. For eg. if int credit rate is > than 30 yr rate, then the pvab is probably greater than the account balance If the lump sum age 65 annuity factor is greater than the annuity conversion factor then the pvab is potentially greater than the account bal. Bottom line the issue is, is the pvab greater than account. If it is then that would be the lump sum. Of course the plan provisions may involve other issues too.

Thanks Mike. It is not a plan I administer, but I am helping one of the former employees. And when I chart the 411 pattern for my client it failed. SO that is why there is consideration to amend the plan to compute accd benefits based on the project and prorate technique. And I was thrown off by their response, since the accb ben this way resulted in a lower accd ben then when I did it. And this was due to the higher railroad offset, which I don't know of as of yet either.

It is a pre tax reform plan and probably was designed with 71-446 in mind. My understanding with 71-446 you could have an offset at normal retirement as much as 83 1/3 %, with it reduced for early retirement. Except with this plan it has a unit accrual for the gross benefit and a projected accrual for the offset. That's why the accd ben is less than zero for a long period and that's why I feel it fails 411(B). I do feel if they (amend plan) use a method that projects the benefit to normal retirement and then applies a service prorate, then the formula may be reasonable. Although this is a railroad plan and at 65 it incorporates an offset that is much higher (that is after 10 years of service). This offset is 70% of the railroad benefit and not the soc.sec. benefit. SO the result is that the age 65 benefit is not nearly as high as under the original soc sec offset formula, due to the much larger railroad offset. Any thoughts?

Thanks for the responses. Gary

A plan requires that the act equiv mortality table be the 1971 GAM for males projected to 1978 using scale E. I applied the scale incorporated in my spreadsheet program and it resulted in a small change in the q's, relatively, and a small change in for eg. the age 65 annuity. I don't recall exactly, but I believe the impact on the age 65 annuity was maybe 1% or so. My questions are: 1. Does it make sense that the impact would be this small? 2. Does anyone have a copy of the scale E and know where it originated? Perhaps it wasn't applied correctly. My feeling is that applying a mortality projection scale requires the factor (less than one) to be multiplied by the nth power, where n is the number of years projected out. i.e. in my case it would be 7 (1971 to 1978). Finally this factor is applied to the q's resulting in lower q's, thus higher annuity factors. Any comments?

Yes I too believe that a project and prorate could remedy this. And the Plan administrator proposes this as a remedy. However, there's more. I have not been able to review what the administrator proposes as of yet. But I will say that I did a somewhat rough calculation of what I project the age 65 benefit to be and I arrive at a monthly age 65 benefit of about 1,200 and the Plan comes up with a benefit of $ 600. Something obviously is going on. The administrator said that the age 65 offset is based on 70% of the sum of the SS ben plus the Tier 2 benefit (since this is a railroad plan) and is much greater than simply the SS offset aspect. The reason why only the SS offset was applied to the accrued to date method was because the Tier 2 portion does not come into play until the employee has at least ten years of service. And was not applicable in the accd to date method and is applicable in the age 65 project and prorate method. At this point I am a bit confused and clearly need to learn some facts about how this offset works and if what they are proposing is reasonable. Somehow I don't like it, but we'll see if their facts are in order. Any comments to this?

RCK, I have been able to demonstrate that the above formula did not pass any of the 411 tests. Furthermore, fyi, they compute the SS Ben based on base compensation years at terermination in the denominator. That is, not based on the usual 35 years. Thus the offset is made even higher due to this issue. In any event it did not pass 411 even if they used a SS Ben with 35 years in the denominator of the PIA calculation. Gary