EOY Valuation assets

[FAPInJax]

I will not attempt to influence the learned people viewing this message with my opinion (until after when I will post my answer and rationale).

However, the following situation is interesting (I think):

Valuation 12/31/2004

Actuary assured the client that with the income they were generating and age/compensation data that a 100,000 contribution could be generated easily.

Client promptly contributed on 4/1/2004 100,000. They also invested the contribution in a speculative stock that has paid dividends. The stock is already worth 200,000.

What should the actuary use as assets for the valuation at 12/31/2004?? (Assuming that they do not appreciate any more by then <GGG>!)

a) 200,000 minus prepaids of 100,000

b) Zero (first year of the plan)

c) Something else???

Thanks for any input in advance.

[david rigby]

IMHO, the first year assets must be zero. No ifs ands or buts.

[Blinky the 3-eyed Fish]

I stink at using the search feature. There was a past discussion where the assets lost money in a similar situation. I would be curious to find it if I knew the right keyword.

[SoCalActuary]

With a new plan, you can use any asset valuation method desired, including beginning of year, end of year, or end of year with "book value of assets" aka projected assets. What you pick stays with you for five years.

Beginning of year valuation is easier, since asset=0.

End of year => 200,000 - (100,000 + pre-contribution interest)

Book value $100,000 plus presumed interest, less pre-contributions w interest (net = 0) for the first year. However, this falls outside the 80% 120% market corridor on the facts presented.

If you use beginning of year valuation, then you must make assumption on rate of pay. Sometimes that assumption is inconvenient to the desired budget. Presumably, the method you choose for rate of pay should also be consistent for 5 years as part of the funding method.

[FAPInJax]

Very interesting! Especially, the commentary regarding that the use of zero assets violates the 80/120 rule with respect to the market value of assets.

I promised to disclose my thought and it agreed with pax. However, I may rethink this position based on the above.

Let's revise the facts and assume the client proceed to make a 'doctorlike' investment (in other words lost 50%).

Now the assets at the end of the year are only 50,000.

Does an end of the year valuation use negative assets??

[Blinky the 3-eyed Fish]

I found the discussion and it was started by you Frank

http://benefitslink.com/boards/index.php?s...t=0entry62150

Here's another one

http://benefitslink.com/boards/index.php?showtopic=12988

Did the question get answered in the Gray Book pax?

[Effen]

Seems to me that you need to ask yourself a more basic question.... Why are you doing an end of year valuation for someone who obvioulsy wants to put the money in earlier?

[david rigby]

To the best of my search capabilities, this question has not been answered in the GrayBook. That does not mean that it was not submitted; there are always questions for which the IRS chooses not to respond.

MGB: if this has not been submitted in the past, please include it for the 2005 GrayBook.

[FAPInJax]

IF I was doing the valuation, it would definitely be a beginning of the year valuation!!

This case is where there is no history of compensation to use (although I might use a rate of pay assumption to solve that issue).

I need to get better at the Search (to find out prior topics like Blinky - thanks!!). I vaguely remembered asking a similar question but could not find an answer.

Thanks to pax for suggesting it be included as a topic for ASPA. Maybe it might even get answered.

[Guest dsyrett]

I thought the IRS position on this was Frank's

a) 200,000 minus prepaids of 100,000

above.

Ie., Standing on 12/31/03, you are using methods that will not create a gain or loss if all assumptions are realized going forward.