MGB

That is not correct. The cashout limit cannot be raised in an ERISA plan above the 411(a)(11) maximum (5000), neither retroactively or prospectively.

To the original question: The only thing you need to be careful about is the possible discriminatory timing of the amendment. If large numbers of NHCEs have just been terminated or retired just prior to the amendment and it is mostly HCEs getting the lump sum, there could be a problem. To Keith: I have never heard of a one-time lump sum option. Something doesn't smell right here. Have you gotten clear IRS guidance on this?

There are two different types of transfers. You can transfer from an IRA to a 401(k). Those assets become part of the 401(k), just like a rollover from another plan, and no longer have anything to do with an IRA. The proposed regulations have nothing to do with this transaction. Or, a 401(k) can create "deemed IRA" accounts which can be annually contributed to or have other assets (rollovers from other plans or another IRA) transferred to it. The regulations only address creating the deemed IRA, they do not address transfer issues. There is also a lengthy regulation from EBSA on deemed IRAs. There is expected to be a lot more coming out, because the IRS and EBSA proposed regulations did not cover nearly enough of the perceived problems in order to properly set these up.

I vote for no. 1. In 1.412©(2)-1(b)(6), in setting the corridor, they refer to the fair market value (defined in Pax's reference) as of the valuation date. Later, in (7), the description of an averaging method uses similar language of fair market value to define the inputs to the averaging method. Given that you would include the receivable in the fair value before applying any averaging, I think it is appropriate to include before applying the corridor for consistency. In the paragraph (8)(ii) about an "adjusted value" (part of the averaging process), they come very close to saying receivables are included. Perhaps some actuaries do add receivables after averaging instead of before. In that case, then the corridor should be applied before the receivable. However, this doesn't make sense to me, for the earlier reason stated that receivables are deemed to be made on the last day of the prior plan year. But, there is a very practical side of this. If it is appropriate to use either approach, wouldn't you want to use method 1 to give you more of a range?

The Emerging Issues Task Force of the FASB reached a conclusion at their meeting two weeks ago that the only proper attribution method for a cash balance plan is traditional unit credit. Up until now, there has been a wide variance in approaches to applying SFAS 87 to a cash balance plan. The other very common method is to project out all salary and interest credits and then prorate on service. This is no longer allowed. All measurements after today must use traditional unit credit. Any change in PBO due to methodology should go through the gain/loss (this was in the EITF minutes). At the end of the EITF meeting, Jules Cassel made the following "observation" (if an observation is included in the EITF minutes, it carries the same weight as a published staff Q&A). For plans that use a market-based rate to credit the account balance, the discount rate must be that same rate. This was included in the EITF minutes. EITF minutes must be ratified by the Board. At today's Board meeting, the observation about the discount rate was dropped from the minutes prior to ratification. The FASB staff was directed to write up a more comprehensive position paper on the specific circumstances that a discount rate other than corporate bonds would be used. This may end up as a staff position paper (similar to Q&As) or be sent through the EITF. In any event, this is expected to be completed fairly soon. By the end of this year, many cash balance plans may be required to use a different discount rate than they are currently using.

I think the initial plan document must contain all EGTRRA language. At least that would be the case for an individually designed plan, but, I am not an expert on what happens if you are using prototype, volume submitter, etc.

In discussions with the authors of the regulation, they say that this reference to "normal form" is not the same as what we think of as the normal form at NRA. They are using it generically that the benefit formula is defined in terms of a lump sum. However, that doesn't necessarily mean that these rules, if finalized this way, would result in this really being the normal form. Numerous comments on the proposed regulation stated emphatically they need to change this language.

People need to get their terminology correct. The 10% early withdrawal tax is not a penalty, it is not an excise tax, it is an "additional tax." It operates in the same manner as raising the marginal income tax rate by 10%. This distinction is important because certain things can be waived and others cannot be under normal conditions (a penalty can be waived, a regular tax cannot). And, as was discussed here, the fact that it is a regular tax has implications for the interaction of withholding and taxes due. Yes, the withholding does get used for satisfaction of the 10% additional tax, whethere the withholding was the standard amount or if it was increased to an individually-designated amount.

The LSA and RSA accounts were never a part of the current tax plan. These were two completely separate "proposals" from the Administration. No one in Congress has introduced proposed legislation similar to the LSA and RSA proposals. The whole idea died after the Administration proposed it. It may again resurface when the Portman-Cardin bill is marked up in the Ways and Means Committee (sometime in the next few weeks), by an amendment to that bill. However, there is very little support for anything along the lines of LSA and RSA by anyone in Congress. Nothing in the agreed-to tax bill has changed IRAs in any way (at least up to now - the actual language of the agreed-to tax bill is purely verbal at this point, there is no bill).

There is a huge need for more volunteers because the large firms will not allow their employees to participate in the program (too easy to have a conflict of interest). This program originated as a joint effort by the DOL and Pension Rights Center and later got the Academy involved. Although the AAA website says it is an AAA program, I think there are still other professionals involved.

Does the plan document reference the CBA? I just reviewed an IRS audit of a plan. The CBA is referenced by the plan document. The CBA says that no one may work above X hours per year (overtime restriction that is not in the pension area of the CBA). However, this rule is administered in a lax manner and some participants work more than what the CBA says. The IRS says that the plan should be disqualified (going through a correction program now) because it is not being administered according to the plan terms.

I don't understand your descriptions. There is no such thing as a "frozen pension cash value" amount in a defined benefit plan. Where did this come from? Is it supposed to be the present value of some other defined amount of monthly benefit? The offset sounds like it is just the actuarial equivalent of prior payments. Yes, that increases with time.

My response was in conjunction with the regulation language that points to the "applicable mortality table under 417." In last year's mess, the adoption date by the plan became the triggering point for when the GAR94 was the applicable mortality table associated with that plan.

I would say that it is dependent on when the plan adopted the table. The latest date of adoption was 12/31/02, but you could have adopted it as early as 1/1/02 for a calendar year plan. The testing date would tell you if the plan had adopted it by then or not.

Yes, it requires quarterly statements. Somewhat probable of passage. Note that it also passed the House last year, but stopped there. The main problem is the investment advice. There have been competing proposals out there and Boehner's approach has not been universally accepted. The Senate at this time has no plans to do anything with it. After the stimulus package is done with, it is unknown what they may take up, but pension-related bills are not a high priority for them.

Technically, the correct way is to recreate all numbers back to initial application of SFAS 87. The aggregate-to-date change in accrued expense is recorded as an adjustment to income from a change in accounting methodology (changing from treating it as immaterial to material). If it turns out to be significant, it is not reported as a current adjustment, but instead they must restate all prior earnings. Note that even though it was ignored in the financial statements as immaterial, that does not negate the fact that there were numbers associated with it all along. Assuming that a full recreation is not feasible, it is up to the auditors as to how to handle the recognition of the change in method. The "best practice" way to do it is as described above, but use estimates of what prior years would look like. If the whole situation is not material enough to even warrant that estimate, then the auditors just need to make a decision on how to move forward. Certainly, the differences in bottom-line numbers under different approaches should be one of the factors they should consider in what to do. Beyond that, there are no specific rules out there that you can look up on how to do this within the context of SFAS 87. Instead, what you are doing here is a change in accounting method that has other rules applicable that translate into what I've said above.

The answer is going to depend on "why" they haven't done it before. Were they just purchased? Was it an oversight and they really should have been doing it all along? Did they change from a company that didn't need to do it (e.g., a private firm), to a company that needs to produce US GAAP statements for the first time? Etc.

Although this discussion has focused on nondiscrimination in the context of HCE/NHCE, why wouldn't the lower allocations post-65 be age discriminatory and illegal under 411(b)(1)(H)(2)(A)?

None of the above. "(4) The choice of - Lump sum (using factors applicable in the future) of the 1000, PLUS 500 annuity, or - 1500 annuity." This is the same as (2), except you need to add the additional 500 annuity to the lump sum.

On question 2: Accounting for cash balance plans is very controversial and is applied in numerous different ways, depending on the actuary and auditor. Under many approaches, the liability is not the same as the account balance. So, if the liability is less than the assets that are transferred, there is an immediate gain. That is a point-in-time gain. It would be spread over average future service typically. However, if the cash balance plan at the time of the transfer (one already existed, they just added to it with the 401(k) transfers) were underfunded, the gain would be an immediate hit to the balance sheet, offsetting any previously recorded additional minimum liability. But, it would be hard to believe their plan was underfunded in 1998. In a speech I gave last week, I also called cash balance gains as being mostly derived from "accounting gimmicks" (I was refering to Delta's announcement that they would save $500 million over the next few years even though they grandfathered all workers over 50 into the final pay plan - that doesn't add up; give younger workers more benefit and older workers the same benefit -- where does the savings come from other than accounting gimmicks? As vice-chairman of the Academy's Pension Accounting Committee, I take these public announcements about pension's affects on bottom lines very seriously. Note that the Emerging Issues Task Force of the FASB is addressing cash balance accounting in its meeting tomorrow at our committee's request.). Then there is also the annual gain to the bottom line in the arbitrage between expected return on assets (high) and the increase in the liability (low), which you already recognized.

Just to clarify: B of A's plan (along with other "self-directed" plans) does not have individual selection of investments. What they are selecting is the fund(s) that will produce the interest credit(s) on their account. The plan itself is not invested in these funds. For example, I choose B of A's bond fund for my entire account. If that bond fund increases 10% this year, I get 10% interest credit on my account. However, the plan may have no investments in that bond fund (or, for hedging purposes, it may have investments in it). The funds offered by B of A are the same ones that people had invested under their 401(k). When they went to a self-directed cash balance plan, the 401(k) plan was rolled over into the cash balance plan. The reasoning was that B of A felt that individuals were conservatively invested and that by having the trust invest in more aggressive investments, B of A gains from the arbitrage over time.

It doesn't make any difference what the investment is. There needs to be a procedure written into the plan to convert the account balance into a deferred annuity (note 1). That deferred annuity is what is tested. There is no need to make any assumptions about the investment returns unless the aforementioned procedure makes reference to the latest yield on the balance at the time of the conversion. Note 1: Having said that, I realize there are plans without such language and I don't know how they get by this, not only for nondiscrimination testing, but for a whole host of other issues.

prp, An immediate annuity factor at 5.08% at age 59 is 161.07 and at age 60 is 157.80. Your plan administrator may do various things with these factors. They may prorate between them for your specific age (very common) or they may use an "age nearest birthday" or "age last birthday" to use the factor at that age. Use of this factor assumes the plan uses method (1), below. There should not be any litigation against an unreduced age 62 and 5% reduction before that. These are extremely valuable benefits that very few people have access to and would love to have such a subsidized early retirement benefit (i.e., much more valuable than the normal retirement benefit). It is still not clear to me that you would get the present value of the early retirement benefit. The amount of the lump sum can be three possibilities: 1. The present value of the early retirement annuity multiplied by an immediate annuity present value factor. 2. The present value of the unreduced age 62 annuity multiplied by a deferred-to-62 annuity present value factor. 3. The present value of the annuity at Normal Retirement Age (defined under the plan) by a deferred-to-NRA annuity present value factor. Even though you are eligible to take an annuity at an early retirement age, there is nothing in the law that requires the lump sum to recognize that early retirement benefit. Under most plans, when you elect the lump sum you are forfeiting the right to the extra value in the early retirement annuity. You need to find out from the plan administrator which method they use to determine lump sums. For example, using age 59 (and 5.08%) and a normal retirement benefit of 1000 per month: Method 1 would be 1000*(1-.05*3)*161.07 = 136,910. Method 2 would be 1000*127.82 = 127,820. Method 3 (assuming NRA is age 65) would be 1000*99.78 = 99,780. The 127.82 and 99.78 factors are for deferred annuities to age 62 and 65, respectively. The fact that method 1 produces a larger lump sum than the other methods is why the early retirement benefit is called "subsidized". By using the early retirement benefit with the 5% reductions, the value is more than the deferred normal retirement benefit. If the normal retirement age (not the unreduced retirement age) in the plan is age 65, there is nothing wrong with only providing a lump sum of 99,780, which results in you forfeiting the other 37k of value by not taking the early retirement annuity. This is how most plans operate.

One of the tenets of the reasonable funding regulations are that costs be reasonably allocated between past and future service. Only immediate gain methods that can put all of the liability into past service are reasonable in this situation.

It doesn't make any difference if it is "may" or "shall". If you don't do it and determine a quarterly that is due, it will equal or exceed the quarterly that you otherwise "may" have computed. Obviously, if they actually contribute less than what is necessary, you "shall" compute the prior year at 120% so as to not overpay excise tax or late interest penalties. Even if this were a "may", you would still do it.