Takeover DB Plan

[Blinky the 3-eyed Fish]

The prior actuary used actual compensation for the year for a beginning of the year valuation (ex. 2003 comp for a 1/1/03 valuation). I don't chalk it up to the wrong category, but I also don't like that methodology. Do you think this is:

a) a component of the funding method

b) an assumption

If a), do you see a way to change this with automatic approval?

[david rigby]

c) a mistake ?

[AndyH]

I've seen this justified in the first year as use of "rate of pay", and by actuaries that I consider to be highly ethical.

I'm not defending it or explaining it, just stating a fact.

[Effen]

It's also fairly common. The IRS has stated repeatedly that it doesn't like it, but it is still very common in small tax shelter plans.

[Blinky the 3-eyed Fish]

Okay, now let's focus back to the question. Like I said, I don't think it is necessarily wrong, but I don't like it and I want to change it. If I can classify it as an assumption, then no problem in me having different assumptions. However, if it is a component of the funding method, I don't see a recourse without applying for approval.

Just seeking opinions here.

[david rigby]

My hunch is that the IRS would view this as part of the method. I'm unsure if I agree with that. How about significance? Since the amortization would be similar, perhaps the magnitude of the issue might help make the decision.

[rcline46]

We look at it as a funding assumption - basically actual salary scale for the year.

Of course if a salary scale is used, the software may be calculating a current liability number based on the assumed sal scale which is on top of the 'actual' sal scale and that would be wrong.

[David MacLennan]

I'd consider it a funding method, mostly equivalent to a EOY val with an asset valuation method of 1+i times BOY assets. I can see where people could call it an assumption, but a different assumption of salary scale for every participant? That strains the English language a bit with respect to the nature of an assumption. I've taken over 1 or 2 small plans that had a asset valuation method of 1+i times prior year's assets.

[WDIK]

...but a different assumption of salary scale for every participant?

In my opinion, this is the most compelling argument made thus far.

[MGB]

Just an opinion (no experience in this area): part of method.

[david rigby]

I see no theoretical problem having a different salary scale assumption for every participant, but certainly a practical one.