MGB

An Implementation Guideline was issued in 1997. Paragraph 57 addresses receivables: "Q: On what evidence should a plan report receivables for contributions from the employer(s), plan members, and others? A: Receivables for contirbutions should include amounts receivable from the employer(s), plan members, and others (for example, a state making "employer" contributions on behalf of local governments) pursuant to statutory or contractual requirements; and also amounts due based on formal commitments to pay made by the employer(s) or by other entities making contributions on behalf of employers. Evidence of a formal commitment requires some judgment and may include (a) an appropriation by an employer's (or other contributing entity's) governing body of a specified contribution or (B) a consistent pattern of making payments after the plan's reporting date in accordance with an established funding methodology that attributes those payments to the preceding plan year. The standard indicates that a plan should not recognize a receivable based solely on an employer's recognition of a contribution payable in its financial statements. THis is because Statement 27 requires sole and agent employers to recognize liabilities if annual pension cost is not fully paid. Because annual pension cost is not necessarily equal to the amount charged by the plan to the employer and any difference may not be realizable by the plan in the foreseeable future, the GASB concluded that employer recognition of a liability for unpaid annual pension cost is not, by itself, sufficient fo the plan to recognize a corresponding receivable." Also, paragraph 58 says that any installment contract (e.g., purchase of service credit over time) should have the full amount be recognized as a receivable at the date of the contract (accrual accounting focus). In relation to your issue of whether the auditors have any input: Paragraph 51 discusses Statement 27's paragraph 10g: "...to coordinate the actions of the actuaries and financial statement preparers with respect to the resolution of differences that occur between the ARC and actual contributions. The issues are whether the difference will be settled in the short term and, if not, when the difference should begin to be included in the determination of future ARCs for both actuarial valuations and accounting...The actions of actuaries and financial statement preparers in addressing these issues need to be in harmony. Otherwise, the funding and the accounting calculations will diverge and become increasingly different."

No. Amendments effective after the plan year may not be recognized.

No, there is no "adjustment" because you never had the option available to them to begin with. There is no J&S 100% option for this person. The maximum option available is the amount in the table. The plan needs to have specific language in it providing this other option. For example, if the plan only has a 100% option, there is no J&S available to this nonspouse. If the plan only has a set of fixed options, you would need to make use of only those that fit under the table for this person. The plan may have language that "creates" a special option for this person, i.e., the maximum amount in the table is available, but that depends on plan language. The factors to use to convert from the normal form to this option would need to be specified.

It has always only applied to nonspouses. It was in the 1987 proposed regulations, the 2001 proposed regulations and the 2002 final regulations. A similar requirement applied prior to 1987, although not as specifically laid out in a table. Prior to then, you needed to prove that the death benefit was incidental using general concepts found in prior guidance. Basically, the table was more generous than the prior calculation procedures so you would have been even more restricted back then.

In order to have a rollover, the spouse has already consented to a lump sum distribution and waives the J&S. The receiving plan or IRA does not need to have a J&S feature. So, yes, they can receive rollovers from money purchase plans.

The point is that the maximum is NOT similar to the PBGC maximum. The PBGC maximum is per annuitant. State insurance funds' maximums are per contract. A plan has only one contract when they terminate the plan. So the fixed dollar amount (that is present value, not an annuity amount) is spread across all participants under one group annuity contract. In a 1000 life case, that may be a total of less than $100 each (present value, not annuity amount).

In large plans, a very large percentage take annuities. One of the driving issues in the annuity selection is subsidized early retirement. Rarely does a large plan include that subsidy in the lump sum. So, for early retirees (which is the majority of actual retirees), the annuity is worth more than the lump sum. Also, not everyone feels confident they can manage the investment of a lump sum. Especially when they hear the horror stories of their neighbors being ripped off by unscrupulous investment advisors.

This is the most ridiculous thing I've heard during 25 years in this business. The person suggesting this has no idea what they are talking about.

I thought the final Executive Life payout averaged about 70% for annuitants, inclusive of guarantee funds. Actually, California did not have a guarantee fund when Executive Life went under (a large portion of their business was there because they were based in Beverly Hills). Later legislation applied some amount of the new guarantee fund retroactively. I recall my examination of a few states (some of the better ones) end up with a major problem with terminated plans. The issue is the maximum guarantee. It applies on a per-contract basis and the entire group annuity purchase is one contract. So, if you have 1000 participants with annuities coming, a $30,000 (or whatever) per contract guarantee doesn't go far.

By taking it offshore, the plan sponsor loses all the protections afforded them under state laws for professional malpractice. Any plan sponsor doing this needs to have their head examined.

The HRA rules are not concerned with contributions...only expenses. There is nothing in the guidance discussing putting any money aside for future liabilities. It is only guidance on what liabilities may be carried forward without triggering taxation to the participants. Although not addressed in the guidance, the benefits community assumes that an HRA could be used in conjunction with a VEBA. There is no other funding vehicle available where deductions could be taken (other than a 401(h) account in a defined benefit pension plan - and I doubt they would be appropriate for an HRA). Given your aversion to a VEBA, there isn't anything else available.

Yes, they are a part of the accrued benefit that is used to determine if the limit is exceeded. There is no distinction in the law between employer-derived benefit and employee-derived benefit for this purpose.

It is my understanding that the current Section 411 does not apply to government plans. However, pre-ERISA rules do apply, so if there were break-in-service rules back then (I don't think so), they would apply.

In order to recognize income, GE had to have recognized expense in the past, and/or would have recognized a certain amount of expense in the future. The posting of income is a recognition that they either overexpensed (and contributed - creating an overfunding) in the past and are now reversing that, or that their future expense has decreased due to experience in the past. The bottom line is that the plan is overfunded (which could have occurred because single digit interest rates were projected during the years before they actually realized 20%+ returns). If they had not overfunded it (and expensed all of that in the past), then they would not be now reversing it to recognize they have actually experienced the additional overfunding. The focus on the current income statement of one year is inappropriate. That is not what financial accounting is meant to do (that is what the measure "cost accounting" does). Of course, the popular financial press has created this mythical overzealous focus on the current numbers. Financial accounting is supposed to be looking at the long-term nature of commitments and effects. In the aggregate, over the life of the plan, GE has not recognized net income -- that would be theoretically impossible. Any current income recognized is only a mechanism to reverse overexpensing in other years. (Now it perhaps would be more theoretically correct to "restate" prior earnings for decades to recognize the pension income as an offset to expenses in those years instead of recognizing it as current income, but that would create even more confusion.) Yes, they put that income (even though there is no cash flow) to use to produce future revenue...through their employees. This is not some sideline operation totally set apart from the business. The pension plan has a major impact on their personnel. The ability to recapture the excess assets is irrelevent to the nature of why it is accounted in the way that it is. The only time that the above theoretical reasoning for financial accounting to recognize income is not appropriate is when the assets exceed the present value of total future benefits (with full projections). (There is no large company in this situation.) Income that is generated above that point could then be tied to the ability to recapture the funds. Under IAS 19 (international accounting for pensions) this is, in fact, what they accomplish through the "asset ceiling". They allow pension income, but only up to a point that is theoretically sound....i.e., if there is no future expense that is being offset because of current conditions and/or on top of that, the assets cannot ever be recovered (after the cost of termination including taxation, etc.), then income above that point cannot be recognized. Generally, no company in the US would hit this asset ceiling given the current amounts they are recognizing as income. I became a member of the Academy's Pension Accounting Committee in the late 80s (and am a current member) and am constantly in conversations with the press about the nature of financial accounting and where pension calculations fit into the theory and basic principles of that style of accounting. One needs to understand the precepts, fundamentals, and objectives of financial accounting before they focus on the pension aspect. There are other styles of accounting that are based on other fundamentals and objectives under which pension income may not be appropriate.

Yes, the entire account balance is used. Each distribution must have a pro rata portion of after-tax basis and taxable portions.

GM is not assuming 10% for funding calculations...the assumptions for funding is made by their enrolled actuary. That calculation is the only thing that will cause future additional contributions or not. The 10% is completely irrelevant to whether or not they will need to fund more. This 10% figure is used for financial accounting only. You are mixing up calculations for accounting purposes versus calculations for funding purposes. The two are completely different and unrelated. Each has different rules applying to them on who sets the assumptions and what criteria should be used for setting them. In the accounting calculations, if they only earn 8.4%, then the earnings will automatically be adjusted downward due to the mechanics of the amortization of gains and losses...there will not be any "restated earnings downwards", the actual return works its way into the calculations without their doing anything different.

These companies have been using the same assumption for the past decade or more. When the plan was earning 15-25% return each year in the mid-90s, no one was thumping their chest on a soapbox claiming that 9 or 10% was unreasonable and that they should switch to something higher. The additional actual return those years created gains that are being spread over the future (typically 15 to 20 years). Now that they are receiving returns lower than 9 or 10%, they are producing losses offsetting those gains that are still being carried over. The net result is exactly what the methodology expects: you have gains during an upcycle and losses during a downcycle and they even each other out by being spread over a long period of time. The expected return assumption is a long-term expectation of how these gains and losses will work themselves out. It is not intended to match any one-year expectation or actual return. Has there been a fundamental change in the investment environment that would indicate the next 30, 40 or more years (the time frame of pension projections) are going to be very different than what was expected in the future just a few years ago? Obviously, there are some that claim this. Others just see the current situation as a down market that will recover (albeit maybe later than sooner). If you believe the first contention, you should lower your expected return. If you believe the second contention, you should INCREASE your expected return...not only will there be the same long-term expectations, but there will be additional return to account for the rebounding of the market. Neither side is "right", nor can anyone claim with certainty that one side is clearly superior to the other. Sitting in the middle, one should stay with whatever they were expecting before (unless, of course, they were expecting too much to begin with...but then, there was that 20 to 25% return for a number of years). Is 10% too high? I would not be comfortable with it. But then, there are very few firms going this high. Most are in the 8 to 9% range. The funded status of plans is a completely different issue and is unrelated to these assumptions of the expected return on assets. The funded status is based on the discounted present value of the liabilities compared to the actual assets. These are not discounted at the expected rate of return (the 9 or 10% alluded to above); they instead are discounted at the rate found in high-grade bonds which is currently around 7%. If interest rates edge up in the future, the underfunding could go away just from a change in this discount rate.

There are even some clean, non-converted cash balance plans that are stuck in the moratorium. Some reviewers will let them through, but most are kicked up to the national office and sit. Yes, you still need to file by the deadline in order to preserve the right to retroactively amend the plan for any problems.

You hit the nail on the head. The media is making a big deal out of a nonissue.

You are correct in (3), the 6/30/02 date was a fixed date. So, you end up funding for one year at 160,000, but the person can be cut back after the fact to 140,000.

I agree with you. In fact, in many situations, the actuary wouldn't even know what deduction were taken by the plan sponsor. It is what should have been deducted that should be used in any later calculations of deductibility based on the former contributions. Note: Technically, an enrolled actuary does not have the authority to say what the maximum deduction is. There is nothing in the law or granting of the EA status that provides the actuary with this authority (we are enrolled to practice before the IRS/DOL in certain matters of ERISA -- IRC 404 is not included in that list). The actuary can provide calculations, but is in no position to be the professional giving the last word on it. Any actuarial communication about the maximum should include the caveat that the plan sponsor should have tax counsel review the appropriateness of the deduction. If a plan sponsor is taken to court by the IRS, they do not have a defense that they were just following the actuaries' determination of the maximum.

Mike's last statement of the "calculation of the accrued benefit" is true in the context of an average compensation calculation. However, higher compensation in 1993 and earlier can be part of the current accrued benefit in annual accrual-based plans such as career average (where the benefit is defined as yearly accruals rather than a true career average) and cash balance plans. Also, where there was a freeze in 1993 and restart for later accruals on any final-average plans.

I think the final answer is still the original answer I gave: What does the document say?

Brian, He should not have been able to take the 6,000 hardship. At that time, 4,000 of that needed to be kept as collateral for the loan, leaving only 2,000 available for hardship. By taking the 6,000, what he effectively did was to take 10,000 in hardship, erasing the loan into a deemed distribution and should have been taxed on a 10,000 distribution even though he only got 6,000 cash at that time. I agreee with the system that he does not have 2,000 available now. I don't know how it was overridden to allow the 6,000 hardship, as it should have blocked that, too.

DFerrare: I agree, I haven't read that in 20 years and forgot about this exception (I've never had any reason to use it myself as I've never worked with small plans and rarely anything other than calendar year). Mike Preston: I know why they did it. In the Senate version of the bill, it had a schedule of dollar amounts for the next five years, rather than a single change like the final version had. However, the language stated the limits applied to "tax years" ending in 200X, etc. When the House and Senate versions went to conference committee, I noticed this language and realized this would cause problems and override the regulations on being able to use the amount in effect at the end of the limitation year. I contacted the conference committee staffers and requested a change in the language (this was during the round-the-clock 48-hour flurry trying to reconcile the two bills between the conference starting and ending; typically this process takes weeks or months for such a large bill). Although I got them to drop the term "tax" and leave it as just "years", the "ending in" remained and should not have. (The reference to just "years" is sufficient because that is how the law already reads. The concept of a limitation year and being able to use the limit in effect in the "year" that the limitation year ends is purely in the regulations and should not have been addressed in the new law.) The next day, they dismissed the scheduled increases and went with one single initial increase. On the following day, it was conveyed to me that the difference between the DB language and the DC language was purely a drafting error in the rush and they intended both to have the same language.