MGB

It may be a reference to the fact that the "benefit cost" is inclusive of changes in the additional minimum liability. Nonprofits do not have a "other comprehensive income" account, which is available to other entities under GAAP. Any change in the additional minimum liability runs through the statement of operations (i.e., the income statement) in the same manner as the net periodic benefit cost. It is not a direct change to equity (which they do not have), bypassing the income statement like what happens for other entities under GAAP.

They are not plan assets in any way, shape or form. They are a debt of the employer, pure and simple (albeit a "contingent" debt, because some participants will forfeit money from not submitting full claims). An employer treats that debt as any other debt. How they use the assets of the company in the mean time before they actually pay the debt is totally up to them. It is perfectly legal to have NO ASSETS backing up that debt (for example, a small service-oriented company that has no assets) and pay claims completely out of future cash flow of the company. It IS the employer's money and they CAN "do whatever they want with it." These are salary REDUCTIONS. The money never existed to begin with; it is purely a promise by the employer to cover an expense in the future and only exists as a bookkeeping entry as a debt. (Assuming there is no associated trust, which is the case 99%+ of the time.) A debt doesn't necessarily have assets identifiable with it.

I realize this has been discussed many times, but I couldn't (easily) find a full, definitive answer to how this works. (I have not worked with small plans before.) A PBGC-covered plan only has the owner left (closing down business at retirement, everyone else has been paid out at termination of employment). It is underfunded and doesn't want to contribute anything. I understand they can sign some type of waiver. Who is this going to? Isn't this just to let the PBGC know that all benefit liabilities have been satisfied? What happens when the IRS finds out the plan was terminated and not all accrued benefits were paid? I am confused as to what i has been dotted and t has been crossed (or not dotted and not crossed), with open liability (to the actuary or TPA) still hanging out there.

I noted that Holland's unofficial comment at the CCA meeting in Hawaii (actually it was a question some of us posed to him a few weeks before that and he responded he would address there publicly) is included here. That is where you have an automatic cashout up to $1,000 and a discretionary employee-chosen lump sum up to $5,000 (note that you do not have to arrange for any relationship with an IRA provider this way). The question was whether or not the up-to-$5,000 discretionary lump sum was subject to QJ&S disclosure and spousal consent. The answer is no (which makes such an arrangment all the more attractive). Also, they have the amendment language here. I didn't notice anything else new. Did I miss something here? Seems like a lot of Q&As already covered elsewhere.

I disagree with the opinions here. The phrase that has not been mentioned from 411(a)(8) is: "For purposes of this section..." and then it goes on to say to use the NRA from the plan if earlier. This certainly leaves open the possibility that the plan's NRA is later. A plan can have any NRA, e.g., age 80 or even SSNRA. It is only when you try to apply the vesting rules and accrual rules of 411 that you need to incorporate the override of 65 & 5.

I agree. Whether or not taxes and the 10% apply depends on the decisions she made with the distribution in the first 60 days of receipt. If it wasn't rolled over then, it can't be reversed now. Which brings up an interesting question. If she did roll it over to an IRA then, and repays to the plan now from her own funds (not the IRA), would the amount in the plan going forward be considered after-tax money?

First, read the law. There are two levels of excise tax. The first, which you filed with a 5330 is the "initial tax" (see Code Section 4971(a)), and is only 10%. The second is the "additional tax" (see Code Section 4971(b)), and is applied once the IRS decides to apply it, even though the law says it is automatic if the deficiency is not corrected in the "taxable period". These letters are part of the procedures to trigger the automatic 100% excise tax. If you respond to them saying it has been corrected, or have a very good outline of how it will be corrected, life goes on and they don't impose the 100%. But, if you ignore them, or respond to them using words like "inane", they will impose the 100% excise tax immediately. They have been lax in the past in following up on the 100%, but have changed their ways and are ready to impose it at a drop of the hat.

I don't know about Rcline's comment if that is what you are referring to. For the upcoming FASB proposal, the rate will be at the measurement date.

My personal opinion is that there should be an immediate bailout from general tax revenues for any liabilities that the PBGC took on for steel and airline industries. Those industries continually got exceptions from funding requirements all the way back to law changes in the 1980s (we might as well through Greyhound in there, too). I put the onus on Congress for their underfunding (every time funding standards were tightened, they got a pass), and Congress should step up and bail their situation out as a result. The rest of the PBGC could continue on as planned with that move. This is not a bailout of PBGC, but rather owning up to the pork that was handed out in prior legislation. As was previously stated, valuing liabilities at the worst-case scenario for early retirement subsidies and an interest rate just over 3% causes a lot of this underfunding calculation. If interest rates increase (and the PBGC, in turn, changes their assumptions), a LOT of that underfunding goes away. And, by the way, I have since confirmed that United (6.4) and US Air (2.2) are included in the figure. The remaining 5.7 in transportation most likely includes Delta, because other transportation situations don't add up to that (unless there are other United and US Air plans I am not including).

Sorry, I've been working on Social Security rules and they use the term beneficiary to mean participant, and completely missed the reference.

Yes, I was referring to the pre-early eligibility situations (which generally do not include the early subsidies in either calculation).

Also note the latest updates to the "amendment of SFAS 87 and 35 project" (the FASB is no longer calling this an interpretation of SFAS 87 for cash balance plans). (When you go to the FASB site in the future, just click on "project activities" on the left and then go down to whatever they are calling this at that time.) http://www.fasb.org/project/amendment_st87&35.shtml "Decisions Reached at Last Meeting ...The Board directed the staff to develop an amendment of Statement 87 for all defined benefit plans with lump sum features (that is, plans that allow employees to receive an immediate walk away amount upon separation of employment) so that the pension obligation recorded would be the greater of the undiscounted walk away amount that employees would be entitled to if they separated employment at the measurement date or the actuarial present value of the pension obligation at the measurement date."

Appleby, You are reversing the situation. There is a maximum, not a minimum, amount at play here because they are taking distributions before 59-1/2. If the person has taken the life expectancy amount for five years or more, they can now take the rest without affecting the first years' of payments. However, if they are under the five year rule, they must pay the early distribution tax of 10% on all amounts received to date. Taking it all now will subject the remaining amount to the 10% (unless some other exception is involved, as SoCal stated).

Instead of guessing at what is going on, here is the real data behind the press release: http://www.pbgc.gov/publications/annrpt/PAR1104.pdf (Single employer program only:) "Results of Activities and Trends: The trend of large claims against the pension insurance system continued in FY 2004. This resulted in a net loss in 2004 of $12.067 billion compared to a net loss in 2003 of $7.600 billion. The $4.467 billion increase in the loss was primarily attributable to an increase of $9.330 billion in losses from completed and probable terminations and actuarial adjustments of $1.417 billion due to a one-time change in mortality assumptions. PBGC changed the mortality table to reflect its most current actual experience over the period 1994 thru 2001. This was partially offset by decreases in actuarial charges of $5.791 billion primarily due to an increase in interest rates and increases in premium revenue of $510 million. These actuarial charges are the net of charges and credits from actuarial methods and assumptions, changes in interest rates, and passage of time (due to the shortening of the discount period as the valuation date moves forward in time, the present value of future benefits increases)." "The Corporation’s losses from completed and probable plan terminations increased from a loss of $5.377 billion in 2003 to a loss of $14.707 billion in 2004. This year the loss was primarily due to plans newly classified as probable as well as the termination of underfunded pension plans. The loss on probables for 2004 was $11.760 billion compared to a credit of $1.115 billion for 2003. The amount of future losses remains unpredictable as PBGC’s loss experience is highly sensitive to losses from large claims." The following table itemizes the probable exposure by industry: PROBABLES EXPOSURE BY INDUSTRY (PRINCIPAL CATEGORIES) (Dollars in millions) FY 2004 FY 2003 Transportation, Communication and Utilities $15,057 $1,290 Manufacturing 630 2,725 Finance, Insurance, and Real Estate 569 31 Wholesale and Retail Trade 219 573 Agriculture, Mining, and Construction 0 237 Services/Other 451 351 Total $16,926 $5,207 United is definitely in their change under transportation of nearly 14 billion. Note that "probables" are included in the financial results. The change of (16926-5207 = ) 11,719 in "probables" is nearly the entire change in results from 2003 to 2004.

Jay, You have come across what the Academy of Actuaries has been struggling with under the "relative value disclosure" regulations. The reduction from NRA to the distribution date must follow plan provisions. As already stated, this is seldom, if ever tied to 417(e) rates (just look at any early retirement provision). This is an annuity to annuity calculation, the PVAB is irrelevant. Then, there is also a lump sum that is calculated as the PVAB of the NRA annuity using 417(e) assumptions (or better if plan so provides). Now, in order to do a "relative value" disclosure comparing the current QJ&S and the lump sum, it will almost always be a fact that the lump sum is much more valuable than the QJ&S because of the mismatch of assumptions in calculating each, even though they both started from the deferred NRA annuity. However, in the regulations, it states that you can optionally call these "actuarially equivalent" and never mention that the lump sum actually works out to 150% or 200% (for younger participants) of the QJ&S. Note that if an actuary helps in this determination, they are violating Precept 8 of the Code of Professional Conduct that states our work product should not be used to mislead a third party. (Note that the Actuarial Board of Counseling and Discipline has already indicated this result is for real to the Academy's pension committees.) So, one of the reasons for the delay in the relative value regulations was to have a chance to address this conundrum that actuaries are in. Unbelievably, the solution to the problem is to change the regulation from "may" to "must" call these actuarially equivalent. Then we are only following the rules (albeit misleading) rather than being party to a decision that can mislead a third party.

I doubt that many, if any, will be approved. The same people (Holland) do these reviews as funding waivers. The application must prove without a doubt that whatever the problem is, it is only temporary and stretching things out will allow them to get back on course. Not many plans that are facing difficulties now can make that claim. Given that the PBGC multiemployer program is now in the red, the IRS isn't going to do anything that could result in further erosion of that situation. Beyond that political twist, I don't think elections had anything to do with it. Holland sat on these requests for the past few years, long before they updated the Rev. Proc. I suspect he will continue to sit on them. If you increase benefits during the extension period, it nullifies the extension and you recreate an FSA with normal amortizations.

Given that the current session of Congress will end in a few weeks following their lame duck session, there really isn't anything on the table. However, there were proposals put forward (e.g., Portman-Cardin III) to replace the reference to 30-yr Treasury bonds with the same long-term corporate bond yield that is being used temporarily for funding purposes (and hoped to become permanent). This language will be reintroduced soon after Congress reconvenes with a clean slate in January. AARP will not let such a provision get anywhere (they DO own a few in Congress) without an extraordinarily lengthy phase-in period. E.g., no change for a few years and then graduated change into the new index over another set of years. The two of these time periods together could stretch out eight to ten or more years. FASB's decisions a couple of weeks ago that the minimum ABO and PBO should be the lump sum value under all plans will put enormous pressure on getting this provision through a lot faster than was contemplated when it was originally proposed. The FASB ABO liabilities will essentially increase 20 to 30% for all plans with lump sums (i.e., discounting at 30-yr Treasury instead of Aa corporate rates). This is going to have a significant impact on additional minimum liability and create a tremendous outcry for legislative action.

The difference is that the $200,000 replaced the $150,000 that is written into the law. The $200,000 is not in relation to a particular year, it is the law, that is why it applied retroactively. The increases due to inflation each year since then (and in the future) are only with respect to the year that they are calculated for, they do not replace the law's reference to $200,000. If the EGTRRA change had retained the reference to $150,000, and then went on to say that for years after X, the limit were $200,000, then it would not have been retroactive. However, that is not how it was structured...the $200,000 actually replaced the $150,000.

The "Commissioners" that your table refers to is the NAIC. Therefore, rather than "looking for it", follow up on Pax's suggestion by asking the NAIC. Rather than tracking down who at NAIC deals with a question like this, contact their librarians (number on website). They are extremely responsive and helpful (if the table exists, they would have it).

Let's get our nomenclature straight. "QSERP," the name, is a copyrighted (by PwC) style of arrangement. Any consultant other than PwC may not use this name in discussing this. Although all consultants can suggest this arrangement, they just can't call it a QSERP. It is not a nonqualified plan. It is an extra accrual within a qualified plan. A regular, qualified plan (usually at a large organization) runs a 401(a)(4) discrimination test. The outcome of that test will show how much more the HCEs could accrue without violating the test. The plan is amended to allow a one-time additional accrual. These are set up as either an additional annuity amount added to the underlying plan's annuity amount, or as a cash balance style of accrual. The underlying plan could be any design. There are no issues of coverage, rate groups, etc., because this is purely an amount produced by an amendment; it is not accrued over time under a formula. These are done on an ad hoc basis over time (if it were done every year, there is a question as to whether the IRS would see this as an integral part of the accrual of benefits within the plan and need to be tested). If there is a nonqualified plan providing for additional benefits, typically the added QSERP amounts are subtracted from it, regardless of whether there was an original coordination between the nonqualified and qualified benefits. The net effect is to move nonqualified SERP benefits into the qualified plan to be able to get the prefunding tax advantages and/or use up surplus assets in the qualified plan. Hence, the nomenclature "QSERP." No, these are not subject to the new law. But, given that this will potentially move amounts "out of" the nonqualified plan that have already accrued, I wonder if the Treasury will view this as violating the distribution election under the new law? Hmmmmm, this will be interesting to see in guidance, if addressed.

The required minimums are based on the total account balance, regardless of tax status.

This last reference was the Devlin case that I referred to above. Note that it was an ad hoc COLA granted after retirement.

mbozek's reference to the dates in the Conference Report is misleading but not completely false. Those dates are only in there as background where the Conference Report is describing what was in the original House and Senate bills that they needed to reconcile in conference. This effective date was not retained in the final bill that the conference sent back and was passed by Congress. Now it will only apply to deferrals after 12/31/04 with the possible problem associated with post-12/3/04 substantially changed plans. However, you need to be careful about applying a haircut in the future to make sure that it will not be construed as a material modification of the grandfathered plan.

There have been a handful of court decisions going all the way back to the mid-80s saying that the COLA is included in the accrued benefit. Therefore, COLAs may not be eliminated under 411(d)(6) and must be included in the value of the lump sum. The most recent was Laurenzano vs. Blue Cross Blue Shield of Mass. I think the final decisions were made in 2001 or 2002. One of the old court cases made a significant effort to separate the COLA from the retirement benefit and state it as a separate, supplemental ancillary benefit. The court rejected that. A more recent court case (Devlin) found that an ad hoc COLA that was not automatic in the plan document could be eliminated by amendment (reducing future payments). The reasoning was that the COLA was granted after the participants' termination of employment. 411(d)(6) is very specific that it only protects benefits accrued while an EMPLOYEE. Automatic COLAs are considered to be accrued while an employee even though not effective until later.

I suggest only focusing on the future and not dwelling on whether you have had a qualification issue to date. This is the main reason "we" (lobbyist groups and the AAA) were able to get a delay in the disclosure regulations. Once these values are produced, certain situations pop out as inappropriate, as you have found. Rather than displaying this to the participant and essentially creating a wonderful paper trail for the world of ambulance-chasing plaintif attorneys, plan sponsors appropriately have decided to update their factors. However, no one wants to do it if grandfathering applies. So, how do you change them without grandfathering? That was one of the purposes of the EGTRRA legislation allowing the elimination of some optional forms. There currently are proposed regulations on those aspects of 411(d)(6), but we may not rely on them until they are finalized. So, one of the purposes of the delay is to be able to make use of a final 411(d)(6) regulation (assuming they finalize it in time). (I fought hard to make the delay directly reference the 411(d)(6) finalization, but lost that argument.) How does this help? You could amend the plan to add a new benefit option similar to the one you have now that is giving you problems. The new one would have updated factors. Now you have redundant optional forms and, under the future new rules, can eliminate the old version.