MGB

Although it is always dangerous to disagree with a lawyer on a legal subject, here goes. ERISA preemption should not apply to the withholding of state taxes. This is an issue of individual taxation, it is not an effect on the plan or the benefits it provides.

The only thing that smells is the amount of money spent on lobbying to create these perks that others do not have access to.

Obviously, if the number of years to NRD is less than the number of years in the vesting schedule, then the NRD does become important. 100% vesting at NRD, regardless of schedule.

I don't know anything about SIMPLE plans, so I won't guess at those qustions. Why are you asking about using 65&5? You could define NRA as anything you want to accomplish whatever you want. There are no restrictions on what the NRA may be. So, obviously the answer to the question is yes. But the real question is "what are you trying to accomplish?"

mbozek's statement: "My understanding is that Safe harbor design only applies to IRS approval- it does not protect the plan from lawsuits under ERISA for violations of the rules regarding the value of the lump sum distribution (Xerox) or the discrimination against older workers in the benefit formula (IBM)." To be more precise, the safe harbor is purely for passing 401(a)(4) nondiscrimination tests. And, the statement is correct that the safe harbor design would have failed in all of these lawsuits, too. It also doesn't have anything to do with IRS approval for a determination letter.

Why are you doing any recalculation???? That, in itself, is not allowed. I.e., he can't get any more than the prior year's payment (assuming it was calculated correctly) plus the CPI change, and then only if the CPI change doesn't produce a benefit larger than what the plan provided.

Note: I do not do filings, nor advise employers directly, so I do not have any experience in this. I only read and interpret rules to help others that do. I think you should be able to go to 10/15. I don't see any justification for the argument of comparing to corporations. BUT (there is always a but)...I would not feel so comfortable about a recently filed extension request. This extra two months is not automatic, it must be applied for and you only get it if the IRS OKs your request. So, if you haven't gotten that OK yet, then on 8/15, you have hit a deadline. If that deadline is moved to 10/15 at a later date, it seems like a gray area as to whether or not the contribution should have been made on 8/15.

This is an actuarial standards issue. You are required to use your best estimate of future events for assumptions in the valuation, unless overridden by external dictates (like the law), which only apply in the CL for interest and mortality. "Funding for the plan benefits depends on whether a benefits suspension notice needs to be invoked. A projected benefit at 70 (greater of AE or current formula) could therefore be used OR the current benefit at the later retirement age. This is therefore an assumption." I don't understand what you mean by this being an assumption. What does the plan say? There shouldn't be any assumption here.

The new assumptions specifically associated with the amendment should not be viewed as an assumption change. They are additional assumptions that didn't have any place in the valuation before. However, there usually are additional assumption changes that are made in conjunction with this situation that would create an assumption change after accounting for the amendment. For example, this should trigger a discussion with the plan sponsor their future retention of the remaining employees and the resulting personnel policies. Quite often, the window may only be a perlude to continued pressure on the employees to leave (e.g., work conditions deteriorate, salaries are frozen, etc.). On the other hand, sometimes it is too successful and the remaining people get treated like kings to stay on because they can't afford to lose them (I've seen this many times). Either one of these scenarios ought to cause the actuary to change turnover, early retirement rates and salary scales. Another scenario may be that the window really isn't needed to reduce the workforce, but is intended to weed out the "slackers," with full intentions to replace them with younger workers. I.e., those that haven't gotten raises and don't think they will in the future grab the window but those getting high raises stay on. This may indicate the need for adjusting salary scales for the continuing workers.

You have not factored in what happened to the $5,000 he borrowed. What was done with that? If he hadn't borrowed it, he would have needed to use ($5,000 + taxes) to accomplish the same thing. It is this "+ taxes" that everyone misses and offsets the taxes that you are focused on.

WAIT a minute. Ever hear of the Sarbanes-Oxley Act? Loans from a company to an executive are not allowable if she happens to be an executive (a 16-b person) and this is a publicly-traded firm. For a normal rank-and-file type of person, it is OK. One other twist: Some plans have restrictions on the reasons for a loan. I would check that out.

Isn't there a separate rule that allows the IRS, in general, to go back any number of years in the case of fraud?

For those that are not old-timers, a little historical perspective is in order. Under Notice 89-45, each change in benefit structure had to apply the ten year participation requirement separately (if I recall, the IRS felt this way prior to the issuance of the Notice, too). For example, if the plan were amended to increase the benefit 20%, only 2% of that increase could be recognized each year in the future. If a participant already had any years of participation prior to the amendment, that is irrelevant. If a plan terminated and then a new one was later started, that would be considered a change in benefit structure that required a new ten-year phase-in. Following the issuance of the 401(a)(4) nondiscrimination regulations, the IRS felt that these regulations' application to plan amendments was sufficient to "accomplish the statutory purposes of Section 415(b)(5)(D)." So, they then issued Rev. Proc. 92-42 rescinding the phase-in requirement for changes in benefit structure. Holland and others are basing their comments on the logic of Rev. Proc. 92-42. There is no longer a phase-in required on changes in benefit structure; therefore, all participation under all plans is appropriate as is done with the limit itself. Obviously, the Rev. Proc. doesn't go through every example (e.g., a terminated plan and a new plan) of the application of the phase-in, and shouldn't need to in order for the logic to apply.

Blinky, The linkage requires a discussion of the OBRA'87 rate under 412(b)(5) along with the RPA'94 rate under 412(l)(7) and how they are linked to the ERISA funding rate under 412(b)(5). The structure of 412(b)(5) starts with (A), "In General." This sets one interest rate for the funding standard account which is used to determine costs. Then, in (B), "Required Change of Interest Rate," they set up a condition that, if met, you need to change the interest rate defined under (A) for purposes of current liability (i.e., you don't get to skip or ignore (A), it is the first step). In (B)(i), it states ("For purposes of determining a plan's current liability....") "If any rate of interest used under the plan to determine cost is not within the permissible range, the plan shall establish a new rate of interest..." This does not say that current liability is calculated as anything within the permissible range. It only says that if the rate under (A) (the accrued liability rate and, thus, the current liability rate) is outside of the permissible range, then you set the current liability rate to be a different rate that is within the range. The logical reverse of this statement implies that if the rate in (A) is within the permissible range, then the current liability rate is the rate under (A), which is also the accrued liability rate. There is nothing in this language that allows you to choose a different current liability rate if the accrued liability rate is within the permissible range. Just to add some more background other than the law (the above provisions came from OBRA'87), here is the language from the Conference Committee Report on OBRA '87: "House Bill: If any rate used under the plan is not within the permissible range, then the plan generally is required to establish a new interest rate that is within the permissible range." "Senate Amendment: The Senate amendment uses the term "current liability" instead of the term "termination liability" as under the House bill, but the substance of the two terms is the same. For purposes of calculating current liability under the amendment, the interest rate is the rate used for calculating costs under the plan. If such rate is not within the permissible range, however, then for this purpose the plan is required to establish a new interest rate that is within the permissible range..." "Conference Agreement: The conference agreement follows the House bill (using the term "current liability" rather than "termination liability"), with certain modifications. The conference agreement follows the rule under the Senate amendment with respect to the interest rate to be used in determining current liability, with certain modifications. Under the conference agreement, for this purpose, the interest rate is generally the rate determined under the plan's assumptions. However, notwithstanding the plan's assumptions, the interest rate is required to be within...." "No rate outside the specified corridor is permitted under any circumstances. Also, the specified corridor is not intended to be a safe harbor with respect to whether an interest rate is reasonable. The Secretary is authorized to adjust a rate within the corridor to the extent that it is unreasonable under the rules applicable to actuarial assumptions." In 412(l)(7)©(i)(I), it states that the RPA'94 current liability shall be calculated using, "the rate of interest used under subsection (b)(5)" and then describes the effect of being adjusted if you are at the limit of the range. (b)(5) is where both the accrued liability rate and the OBRA'87 rates are. Prior to the previous statement, it says "The rate of interest used to determine current liability under this subsection..." and the question is whether or not that phrase limits the reference to (b)(5) as being only the current liability rate instead of all rates under (b)(5). This should include the accrued liability rate, not just the current liability rate. If they only wanted to point to the current liability rate under (b)(5), they should have stated "(b)(5)(B)", rather than referencing (b)(5). Even if you limit the reference to only point to the OBRA'87 current liability rate, the way (b)(5) works (discussion above) is that the OBRA'87 current liability rate IS the accrued liability funding rate, unless that would put it outside the allowable range. If it is outside the range, then that is the only time the OBRA'87 rate should be different from the accrued liability rate. Then, the next step is to coordinate these with 412(l)(7). (BUT, as I stated earlier, Holland and Pippins have rewritten the law in their minds and disregard this.)

flosfur, The setup of the original question was completely in the context of "we are being told" how to calculate a benefit from a plan, given a participant terminating and needing a calculation. Nowhere was funding discussed. That implied to me the issue was what benefit the participant can receive. The actuary can obviously provide advice, but it is the plan administrator that is responsible. Any legal obligation here is completely in the realm of the plan administrator.

All pronouncements by the FASB (and its predecessor, the Accounting Principles Board) are copyrighted (i.e., they are not available electronically or on the web) and are only available by purchase from the FASB's publication department.

Then it is probably just an auditor approval. But, APB 20 still applies and is difficult to do the calculations required (must historically change the discount and other rates for every valuation going back to inception, not to mention getting the data).

The following is from Jack Abraham, an actuary and director of Deloitte and Touche at the time (now with PwC). This was released by D&T publicly and posted on the discussion forum on the SOA site. The same issues apply to changes in the measurement date: Purpose: This note alerts you to a recent SEC staff view on the preferability of a change in accounting method for determining the market-related value of assets of defined benefit pension plans. On November 29, 2001, the SEC staff provided its views on this matter to the AICPA SEC Regulations Committee. Please share this information with others in your firm, as appropriate. Background: FASB Statement No. 87, Employers' Accounting for Pensions, permits an employer to measure the market-related value of plan assets at either fair value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. Employers may choose to measure the market-related value in different ways for different asset classes, for example, fair value for debt securities and five-year moving average for equity securities. The choice of market-related value of pension plan assets affects net periodic pension cost in two ways: (a) the computation of expected return on plan assets for determining net periodic pension cost and (b) the computation of the amount of gains and losses subject to amortization. A change in the method used to measure the market-related value of plan assets is considered a change in accounting principle under APB Opinion No. 20, Accounting Changes. Accordingly, the cumulative impact of the change since the employer's adoption of Statement 87 would need to be calculated and reported. Further, the company would need to justify the change as a change to a preferable method. When the company is an SEC registrant, a preferability letter would be required under Rule 601 of Regulation S-K (see Rule 601 (B)(18)). Question: Is a change from the market-related value of plan assets at fair value to a calculated value method a change to a preferable method if the basis for the change is to avoid the impact on earnings resulting from volatility in the financial markets? SEC Staff View: The SEC staff has concluded that increased market volatility does not provide a sufficient basis to support that a change from the market-related value of plan assets at fair value to a calculated value method is preferable when the sole or primary basis for that conclusion is that the fair value method resulted in greater earnings volatility than the calculated method. The staff observes that the financial markets have a long and demonstrated history of volatility, and since SFAS No. 87 was issued in 1985 the markets have gone through many cycles, and the financial markets can be expected to continue to demonstrate volatility in the future. Accordingly, all other things being equal, a registrant may not support a change in accounting policy solely on the fact that financial markets have been volatile. The staff’s position should not be construed to infer that the fair value method of determining the market-related value of plan assets is always preferable to the calculated method. Rather, because a decision on preferability of one method over another is based on each registrant’s unique facts and circumstances, there may be factors, other than just market volatility, that led a registrant to conclude that a change in method is appropriate. Registrants with other fact patterns are encouraged to discuss their circumstances with the SEC Staff before making the change.

flosfur, Why are actuaries "certifying" maximum lump sums available? They have no authority to do so. I don't understand your question regarding "d=o". Whatever the actuary is certifying to for funding purposes (which is the only thing the actuary has jurisdiction over) should not constrain the plan administrator from doing their job. It is the plan administrator that certifies the benefits payable from a plan.

NO! It is not auditor approval, it is SEC approval (assuming the entity is registered with the SEC)! Changing the measurement date (or asset method, etc.) is a change in accounting method. In order to change an accounting method, you must file a "statement of preferability" with the SEC explaining why you want to change the method and why it is preferable to the old method. The filing must be before the change. The SEC rarely accepts any changes. If they do allow the change, then you must apply APB 20. This requires you to go back and refigure all numbers since the inception of SFAS 87 as if the new method had always been in place. The aggregate change to date is then recorded on the books (which will include an adjustment to income and an adjustment to the accrued/prepaid and possible minimum liability/intangible asset) and prominently reported in the annual report (not in the pension footnote) as a change in accounting method.

Keith N., I have specifically posed this question separately to both Jim Holland and Marty Pippins in the past year. Both emphatically stated that there is complete discretion in choosing anything within the range. I challenged them on the issue of the CL rate needing to be set to the funding rate if the funding rate is within the corridor, which IS THE RULE in the law, no ifs, ands, or buts about it. Both stated the IRS doesn't require anyone to stick to that rule anymore. I asked them to issue some type of guidance stating that. They said they don't plan to and that I shouldn't worry about it.

Yes, you can eliminate it; yes, a notice is required.

They have been considering this for a long time. The items repealed were written in an educational format, rather than a standards format. Standards provide guidelines on professional behavior. There are a number of different Actuarial Standards of Practice (all written after the repealed pieces) that apply to services under SFAS 87 and 88. Most of what was in the repealed pieces concerned methodology and algorithms for interpreting the FASB standards. That is no longer necessary.

The decision of what the correct benefits are lie with the plan administrator, not the actuary. The actuary has no authority here, other than to determine the proper funding calculation, given the benefits provided by the plan. (This is not actuary-bashing, I am one.)

Moe, "partial plan termination" = "100% vesting of affected participants" The ONLY relevance the term partial plan termination has is that it invokes full vesting.