Maximum deductions

[Gary]

A one participant owner/employee client has a plan year through 3/31.

They had large windfall and are trying to maximize deduction.

I prepared a 3/31/07 valuation and said based on estimated assets the max deduction (150% UCL) was $500k.

Apparently the CPA reports this to the client. The client is happy.

The CPA gets back to me later in day with actual assets. The assets have a large gain and the max deduction goes down to 400k.

A week later, the CPA tells me that I need to use the 500k results.

Any ideas?

I suppose I can check into changing the asset valuation method from market value to a smoothing method. It's a year-end valuation.

The plan is at 415 limit and an amendment to a lower ret age has to be in effect for two years, per 404. So that won't help right now.

The facts above have been simplified for purposes of this thread.

Now the kicker is that the CPA's referred to above work at my firm, thus the demand is coming from internal management.

Thanks.

[mwyatt]

Able to change valuation date to beginning of year?

[Gary]

Let me try and elaborate further, since more precise detail is required at this time.

It was a plan that had a 3/31 plan year end.

So for the 3/31/06 valuation we compute liabilities at 3/31/06 (year-end) and used the 3/31/05 assets plus receivables for valuation assets.

Then for 3/31/07 valuation we use the 3/31/06 assets plus receivables.

Then plan is merged into another company with fiscal year-end of 6/30/07.

Plan year is changed to 6/30/07, 6/30/08 ...

So for 6/30/07 valuation (3 month plan year) I did estimate with the 3/31/06 assets as used for 3/31/07 valuation.

Then I received 3/31/07 assets and did valuation for 6/30/07 with those assets and that resulted in the lower costs.

Point being I can't justify using 3/31/06 assets for a 6/30/07 valuation, when 3/31/07 assets are available.

One thought would be to bring the 3/31/06 assets forward with the actuarial rate of interest to 6/30/07, but again that is for 15 months and don't see how that can be reasonable.

Any thoughts would be appreciated.

Thanks.

[mwyatt]

A little confused here. I take it that your valuation was performed actually as of 4/1/xx, not 3/31/xx+1, with your current liability calculated as of year end using your prior year salary plus SSR (in otherwords, a beginning of year valuation).

Unless you have invented a new "hybrid" end of year valuation using salaries for PYE and BOY assets?

[Gary]

Ok.

Let's say it is a 4/1/06 valuation with assets, liabilities at 4/1/06. Plan year end is 3/31/07.

Then the next valuation is a 4/1/07 valuation for a short 3 month plan year ending 6/30/07.

Where 4/1/06 assets are used for the 4/1/06 valuation and 4/1/06 assets were first used for the 4/1/07 valuation and then we were provided with 4/1/07 assets.

Since assets experienced large gain the max deduction is lower than in the first valuation using the prior year assets.

Thanks.

[Mike Preston]

But you said it was a year end valuation. Now, you have described a beginning of year valuation. Very confusing.

Bottom line is that the CPA that is asking you to stick with the originai numbers is a buffoon and should be s%$t-canned. Take the issue to the managing partner because if you reported that the original valuation was only a "projection" and was based on "estimated assets", the fact that the CPA ran with those numbers as final is a clear indication that the CPA is an incompetent boob.

Strong letter to follow.

[Gary]

Sorry for the confusion regarding the valuation date.

However, you got the concept of the situation right, which is what I am trying to focus on here.

Regarding the CPA running with the first set of numbers:

I had informed them (couple of CPAs working on the project) that it was estiimated assets in the email with costs. Unfortunately I did not hit them over the heads in that email saying something like "THIS IS NOT FINAL'.

I had informed the other CPA (not the buffoon referenced in your response) in a prior email that I needed updated assets before these estiimates could be finalized.

I told them verbally (all but worthless) several times that the plan assets would need to be updated.

So I think the CPA is trying to make me stand by the numbers simply because in my email with the costs, I didn't make it explicitly clear that the results needed updated assets. That is, make me take the professional risk.

An hour or so later, when I did receive actual assets, I informed them of the impact the actual assets had. Apparently since they had already told the client the original results, they didn't care or want to know of my follow up.

Thanks.

[Mike Preston]

This brings up an interesting issue. Should the actuarial standards, which require clear communication and such things as explanations if the information is likely to be confusing (serious paraphrasing, so don't hold me to the literal terms) apply to what are generally referred to as "internal" communications?

I have never felt completely comfortable with such a requirement.

But this scenario makes a powerful argument that they should.

What would you argue for given your experience?