COLA above current 415 $ Limit

[David MacLennan]

I have a 1-participant DB plan takeover case where the contribution figures are quite high. The actuarial assumptions appear to not be fully disclosed in the Sch B attachment as required, since I cannot even get close to the numbers using the disclosed assumptions (the Sch B attachment is a word processor type version, not output from any valuation software). The only way I can duplicate the prior year's numbers is to use a post-retirement COLA in the benefit - with this I can come very close. The problem is that the COLA increases go beyond the current year 415 $ limit. Revenue Ruling 81-195 and IRC 404(j) prohibit this.

The valuation software I use appears to compute the reserve at NRA by using a new interest rate (1+i)/(1+j) to model the COLA. However, there is no 415 $ limit cap to the post-retirement COLA increases coded into the software either. Assuming I'm correct in my conclusions, I don't feel this is necessarily a mistake on the part of the valuation software, just a software parameter that should be used with caution. Another actuary and I have contacted the software company, but haven't yet received a full reply - I expect to hear from them this week.

The client does not want me to contact the prior actuary, probably to limit any problems for them if another professional catches a mistake (although I find major errors in takeover cases all the time, and E&O coverage seems to prevent anyone from ever admitting a mistake has been made). I always proceed with caution before concluding a prior admin firm did something incorrect, so I'm wondering if anyone has a different opinion or insight, or can confirm.

This issue will probably prevent me from taking over the case, as I'm sure the client probably won't want me to revise all prior year's valuations - I don't see how I can avoid this. Anyone have a different approach?

[david rigby]

Interesting. I must presume the participant is under SSRA?

I suggest you consider contacting the prior actuary, or at least make it clear in your engagement that you intend to do so to the extent you need information. Also consider the possibility that the plan sponsor is aware of a possible 415 violation, and intentionally ignored it.

[Mike Preston]

I'm not sure it is a 415 violation, per se. It is possible that the deductions claimed exceeded the deductible amount, but that doesn't give rise to a 415 violation. Unless of course a distribution in excess of the maximum lump sum was also make.