Beginning of year valuation and eligibility

[Guest smhjr]

Let me preface this with the fact that I am coming from 6 years of DC experience, and no DB experience.....

I'm having a hard time conceptually with the rule that you can not keep someone out of a plan more than 6 months after they have satisfied eligibility; combined with a begining of year valuation.

An example:

Calendar year. Employee hires on 2/11/02, works the required year of service and is age 21, they would enter the plan on 7/1/03. Because the plan has a beginning of year valuation, what happens? Does she not receive an accrual for the 2003 plan year?

Now complicate this with the fact that the employer also has a profit sharing plan. The employees are eligibile for either the DB or the DC but not both depending on job classification. The example employee is covered in the DB plan. If she was covered in the DC plan, she would receive a contribution for the 2003 plan year.

I definitely know that I just don't understand how things work yet, and the pension answer book just doesn't seem to be answering this question for me.

[Guest Keith N]

The benefits in db plans are funded differently than in dc plans. It is very possible that you have a "cost" (that is you are included in the calculation of the required contribution for a year) without ever really earning a benefit. It is also possible that you can earn a benefit without ever having a "cost".

For example, lets forget about vesting and say that 1000 hours equals one accrual year. Now lets say it's a 1/1 PY and someone becomes eligible on 2/1/02 and terminates on 11/1/02 after completing 1000 hours. They are generally not included in the 1/1/02 valuation (although they could be depending on the funding method) but they would have accrued a benefit as of 11/1. This person never had a "cost", but they are still entitled to a benefit. The payment of this benefit would be a "loss" to the plan and funded with future contributions.

Now lets say someone is eligible on 12/1/02 and terminates on 3/1/03 w/out 1000 hours. They would be included in the 1/1/03 valuation, but when they terminated on 3/1/03 they never earned any benefits. They therefore had a "cost", but never earned a benefit. The "cost" that was attributed to them becomes a "gain" to the plan and helps reduce future contributions.

This is all a dramatic over simplification. Keep in mind that the benefits in a db plan are driven by the plan doc and have very little to do with the "cost" in any one year. DB plans are generally funded in the aggregate.

In your example, your person would receive an accrual if the document said they should (probably yes). The fact that they were or were not included in the 1/1/03 valuation is irrelevant.

[Guest smhjr]

OK that is kind of how my thought process was leaning towards. The fact that the plan formula says she will receive an X monthly benefit when she retires is the only thing that matters.

Thanks Keith, I was on the right train of thought....definitely helps to read it from someone else. My DC head is trying to confuse me.

The next logical step is then for the 410(b) testing, is she benefiting? I suppose the answer is yes.

[Guest Keith N]

If the accrued benefit increased during the year than I think she is benefiting.

[david rigby]

Keth is correct, but what does the valuation date have to do with it?

In the example, the employee enters the plan on 7/1/03. Assuming the employee meets the minimum number of hours for a year of "credited service", then the employee/participant gets an accrual. It does not matter whether the person is included in the 1/1/2003 valuation census.

By the way, the plan might even award retroactive credited service for the time since date of hire, in which case the employee would ahve 2 years of credited service at 12/31/2003.

[Guest smhjr]

The valuation date seems relavent to me because I am looking at the Datair census and she has a 7/1/03 participation date listed, but yet is also considered ineligible (service below minimum).....I assume because of the beginning of year valuation.

[david rigby]

Whether you include that person in the valuation at 1/1/03 is part of your funding method. Whether that person is a plan participant at 1/1/03 is based on plan provisions.

[Guest smhjr]

I think it has cracked through the skull, thanks guys.

[flosfur]

One more for the road...

To avoid this very confusion, End of Year valuation date is desirable in small plans.

If this is an existing DB plan, then you are stuck with the BOY valuation, forever - there is no auto-approval for changing the val date to EOY! To change to EOY one has to apply for an individual approval at a user fee of $540 or so and there is no guarantee that an approval will be granted!

I don't know why Jim Holland is so averse to EOY valuation?

Has anyone received an approval for change to EOY val date for small plans?

[mwyatt]

Actually, we've been trying to move away from EOY valuations for our small plans. One of the real problems with EOY is if there are unexpected changes in the contribution, it's generally too late to do anything about since you're into the next plan year. Plus you have the dance of trying to zero out profit between salary and contribution. If the val is done BOY, fairly simple for the client to figure out how much to bonus out on 12/31 since they have the DB cost in hand already.

[FAPInJax]

I agree. MANY years ago, the firm I worked for required that all of our clients switch to a BOY valuation (else we found them another actuary locally). We only lost 2 clients out of about 1200.

EOY valuations seem to have a problem with the data coming in late and the client desiring a different contribution level than the valuation generates. This was much easier to handle with a BOY valuation and a little consulting on our part.

[Blinky the 3-eyed Fish]

Personally, I never have a set formula for how to handle different clients. One size does not fit all. I have found that EOY valuations work best for some clients, while BOY valuations work best for others. Though, I do like to start off with EOY valuation in general. You can always switch to BOY, but not the reverse, as flosfur mentions.

[flosfur]

Well, in my experience

1. In small plans the clients generally do not know how much they will earn and how much they would or want to contribute until very close to the end of the fiscal year.

So advance planning is not the name of the name here.

2. The BOY vals I have seen invariably use the compensations and hours etc. for the year of valuation (and not the prior year). Some even treat the participants who terminate during the val year as terminated participant.

and so on. The only item in the BOY vals I have seen that is @ BOY is the value of assets?

I don't know if this even falls within the "reasonable fundigng method" conditions - I will let someone else on the board opine on this.

3. Then there is the problem of accrued benefits to be shown on benefit statements. Normally, the ben stats and the val reports are sent to the clients with Form 5500, which could be as late as 21-1/2 months after the BOY val date! Does one show accrued and vested benefits @ BOY or estimated accrued & vested (based on estimated comp) @ EOY?

If one is doing the valuation in early part of the valuation year, sending out the valuation report and the benefits statements at the same time as is done in the large plans, then I am all for BOY vals.

As to the clients' preference, I have yet to come across a client who gives a damn about the valuation date! So losing only 2 clients is not a testimonial for the clients' preference for BOY val. I am surprised at even 2 clients terminating services because of the val date change!

Finally, as stated before one can change to BOY Val under the auto-approval and use this option when the need arises (there is only one lifeline for this) such as in recent years when the assets declined sharply combined with the clients need to reduce required plan contribution.

Excuse the typos - I cannot proof read very well on the mointor screen.

[Blinky the 3-eyed Fish]

1. Agree

2. See a prior discussion on this topic

http://www.benefitslink.com/boards/index.p...=valuation+date

3. Regarding your comment about the valuation date, no clients certainly don't care about that, they just care about the results. A BOY val delays the effects of actual events by one year versus an EOY val. Clients that have ebbs and flows to their business performance certainly do not like the results BOY vals produce. Granted, there are techniques to use to affect the contribution, especially if within the 412©(8) period. But invariably, to alter the contribution means extra work for my firm and extra charges to the client. Clients certainly care about that.