Problem with Prior Sch B

[flosfur]

Prior actuary changed the funding method from Ind Agg to FIL and for amortizing the new base under S412 used an amortization period of 30 minus # of yrs the plan has been in effect.

Apparently the actuary is way behind the times and has not read the Rev. Proc 2000-40 (or 95-51, which came out over 7 years ago), under which amortization period for new base is 10 yrs (Charge or Credit base)!

The client funded the minimum required contribution computed by the prior actuary - which was grossly understated if one was to follow Rev Proc 2000-40.

What is the new actuary to do?

Redoing the prior yr FSA using the correct amortizaion period would produce a deficiency?

Invalidating the funding mehtod change (because it did not satisfiy the conditions for an automatic approval of Rev Proc 2000-40) and reverting back to the Ind Agg cots method would make the situation worse!

What can /should be done to go forward [other than not taking the case ] !?

[Mike Preston]

Have you contacted the prior actuary to see whether there is a controversy or merely a misunderstanding?

I don't think that the misapplication of the rules of the revenue procedure invalidate the electioin, it merely requires somebody to redo any incorrect calculations in accordance with the rules.

This is precisely the type of situation which the ABCD was created for. Have you called them to ask their guidance?

[david rigby]

The first part of Mike's post is more urgent than the second. Discuss with the prior actuary is much more important than involving the ABCD, at least for now.

[flosfur]

Mike, the funding method was changed for 2001 - 2nd year of the plan, with 29 years amortization period for S412! What am I misunderstanding here? Is there a grey area here? If there is, I would certainly like to know.

As to contacting the prior actuary - do I have the nerve to accept the name calling and abusive language that may transpire as a result of the phone call?

Whether the prior actuary or anyone else corrects the 2001 Sch B, the plan will have a funding deficiency!! I guess the prior actuary will be responsible for paying the 10% penalty on underfunding.

[Mike Preston]

I don't know why there should be any name calling. I think that you owe it to the client to ensure that there isn't something you are missing.

[David MacLennan]

Before you give a formal opinion to the client, I also feel you should contact the actuary, but you should get the consent of the client first (the Code of Professional Conduct recommends this).

I think that for the sake of the client, and for your own sake, you should seriously consider declining the case. Remember that most E&O policies prohibit anyone from admitting an error. Chances are you won't endure abusive language - you'll just waste lots of time. If pressed, the actuary either will not respond or will make a frivolous argument that he/she is correct. The JBEA regs state that an actuary must respond to a plan administrator's request for more information, but as I found out from a similiar case, the JBEA refuses, or cannot for some reason, enforce this (and it took them 2 years to give this shameful response). You likely will spend lots and lots of time on this that the client doesn't want to pay for. Perhaps it is best just to tell the plan sponsor you would have to revise prior valuations and let them decide. Prior actuary pay the excise tax? - in reality I think it would be entirely voluntary on his/her part since the chance of this going to court is probably small. And don't forget to tell the client that IRS enforcement is practically nil. In this case, even if the plan were audited the chance of this particular issue being examined is extremely unlikely, in my opinion. Maybe others have more experience on this.

Re the ABCD, would they make a judgment re right and wrong on technical issues, however clear the error? I would guess they do not - it would be left up to a court if it ever got that far. I thought they were more geared toward "professionalism" type of issues. Does anyone have experience with ABCD on this? Also, if the actuary is just an EA and not a member of SOA, ASPA, etc., then ABCD would not even apply.

I suspect you don't have too many takeover cases, or you would not even be surprised. In my opinion the pension actuarial profession has a real problem with technical proficiency (or delegation of work to non-actuary employees), as a substantial percentage of my small plan takeovers have serious problems (although there is probably some selection going on in this percentage). However, even "high profile" actuaries make mistakes as I have found, so some of this is just part and parcel of doing business in real time frames, and being human.

[flosfur]

David, thanks for your detailed input and insight.

I did refuse to work on the case.

My client is another TPA and the TPA did not want me to contact the actuary and also the TPA was not willing to bring the problem to the actuary's attention!?

I do have a lot of takeover cases and I have had my share of problem cases including the one under consideration. I have reviewed more cases previously worked on by the same actuary and even the simplest case has nothing but problems .... a sample of which are:

A person starts business on 1/1/yyyy (i.e. this is the DOH) and adopts a DB plan effective 1/1/yyyy. The actuary used EAN FIL method and somehow generated an EAN AL > 0, thus creating a base!!? How could you have a PS liability, if there is no Past Svc - I thought that was an elementary level actuarial stuff!?

And this is not a one time mistake as this was the result of a "bug" in the "home grown" system used by the actuary.

An employee's projected participation at NRA of 65 is 8 yrs (YOP), say. The $Max at NRA was correctly adjusted for YOP <10 & NRA <SSRA and the plan's NRB limited accordingly - e.g $8,711 at age 65 for 2001 [11,667*0.9333*8/10]. However, in computing the Fractional Accrued (based on Total YOS), the accrued benefit was not tested against the $Max limited for YOP <10, viz, after 3 YOP and with an accrual fraction of 15/20, say, the accrued benefit was computed to be 15/20 * 8,711 = $6,533 and was not limited to

= 3/10 *11,667 *0.9333 =$3,267!!

Again this is a systematic mistake as the "system" did not have a built in check for the Accrued Benefit vs $Max.

And the problems go on and on.

This is from a very highly qualified actuary and who, I am told, is very frequently hired for "professional" testimony.

Using (30 minus N) yrs for amortizing the Base created by a funding method change (after Rev Proc 95-51) is a very common occurrence. It appears some actuaries stopped reading the new Rev Procs/Rev Rulings etc after they passed the exams.