Reduction of accrued benefits?

[Guest Ron Sevcik]

We have a small defined benefit plan (about 30 employees) that has been frozen since 1993. Because of the poor market since 2000 the assets have decreased substantially and the plan is severly underfunded. The liability on a termination basis is about $1,700,000 and the assets about $700,000. The owner, who is 4 years beyond his normal retirement age, accounts for slightly under half of the accrued liability.

Another actuary is proposing two changes to the plan which I believe are in violation of 411(d)(6). First, he wants to amend the plan to eliminate the post-retirement actuarial increase for highly compensated employees (i.e. the owner) retroactive to his normal retirement date.

Second, he wants the employer to begin contributing to his profit sharing plan and change the DB plan into a floor offset arrangement. He would be using profit sharing contributions made in 2005 and later to offset the benefits accrued in the DB plan prior to 1993.

Does anyone else think these changes are not allowed or are the okay and I am being to narrow minded?

[david rigby]

IMHO, sort of. Those proposed amendments could be done, but they would (one hopes) contain the common language stating that the amendment will not reduce any participant's accrued benefit as of the later of the effective date or adoption date. Thus, no retroactive impact.

[JAY21]

If the owner is willing to consider eliminating post-NRA increases for himself, then it seems likely he would be willing at some point to waive some portion of his benefit to terminate the plan earlier. Under PBGC rules this can only happen if he's a majority owner (50% or more) and once all other participants' benefits are fully funded, so it appears he still has a ways to go and the timing will partly depend on just how much of his own benefit he's willing to forgo. Given that it sounds like he might be willing to accept less than 100% of his full benefit on the back end, you might not even want to try to eliminate post-NRA actuarial adjustments (which I think probably is a 411(d)(6) issue) but rather just focus on funding the non-owner participants' benefits plus whatever % of the owner's accrued benefit he wants funded for himself (if any). The rest can be "waived" by the majority owner (although the IRS likes different terminology than "waive" maybe "election to limit distribution to the amount funded" or something like that).

[david rigby]

Under PBGC rules this can only happen if he's a majority owner (50% or more) and once all other participants' benefits are fully funded...

It also does not apply to plans which are not covered by the PBGC.

[Effen]

just focus on funding the non-owner participants' benefits plus whatever % of the owner's accrued benefit he wants funded for himself

Also, I do not believe that you can waive benefits in order to satisfy minimum funding. In other words, you may be able to have the owner waive a portion of his benefit in order to terminate the plan, but not to reduce the funding obligation.

[Guest Ron Sevcik]

That is exactly what the other actuary is proposing. He is getting the funding cost down to zero by reducing the owner's benefit back to what is was four years ago at age 65. He is also reducing the rank and file frozen benefits by the expected profit sharing offsets based on future contributions. His amendments are not protecting any benefits. To me, it seems that both of these methods violate 411(d)(6). Incidentally, this plan is covered by PBGC.

[david rigby]

I agree with Effen.

[Effen]

This seems like a legal issue. If your client is considering following the other actuaries advice, strongly suggest that his ERISA counsel review it and provide a recommendation.

If his counsel gives you a letter stating that it is ok, and removes you from any potential responsibility, I think you're clear to value the plan accordingly. You can always choose to resign if you’re not comfortable.

If the attorney won't agree to write the letter, and the actuary is still pushing the "solution", maybe the ABCD would like to know about his legal interpretations. "Bad" actuaries hurt us all.

[WDIK]

"Bad" actuaries hurt

So do bad acupuncturists...

[Blinky the 3-eyed Fish]

Under PBGC rules this can only happen if he's a majority owner (50% or more) and once all other participants' benefits are fully funded...

It also does not apply to plans which are not covered by the PBGC.

While technically a waiver of benefits upon plan termination is not on the IRS approved list, they certainly will not challenge it for a plan that is not covered by the PBGC.

While I agree that this actuary is incorrect in reducing benefits for funding, upon whose shoulders is the ultimate responsibility placed? The actuary is the one certifying to the numbers, so upon plan audit it would be his error. Any detriment to the client could be recouped by suing the actuary, at least I would think so. Personally, I never want to go through the experience to know for sure.

Bad actuaries, like bad chicken, mess you up!

[could be me maybe not]

Throw me on the side of those who think that if such a client had an ERISA counsel then this discussion would not have gotten this far.

Here's a bet that such a cutting edge actuary is submitting a $50 consulting fee bill atop his $100 Schedule B fee.

Ron, your instincts are right on. Maybe ask the client to offer him another $25 for a cite or a letter explaining his position.

[Guest Donkey Kong]

Better to throw you than you throw something. Flinging poo is bad form.

[could be me maybe not]

Perhaps you should stick to the topic; Willie's time is short today. If you need to go off topic, scat:

http://p197.ezboard.com/fengrishmessageboa...tart=41&stop=60

p.s. Are those relatives of yours in the background?

[SoCalActuary]

I don't see the justification used by the original actuary for either proposed change in the benefits, so I would encourage you to refer this to ABCD.

Unfortunately, the actuary is making the client's underfunding problem his problem.

But for simply subtle humor, I loved the comment about the extra $25.

[david rigby]

Before anyone goes to the ABCD, do well to remember that we are reading this (at least) second hand, so there is the possibility that some of the facts are not exactly as presented. On the other hand, send the actuary a link to this discussion thread and ask for his response.

[Guest Roman]

Ron,

Make sure that in your letter of engagement, there is a limitation of liability up to total fees you have collected from the client.

Roman