I need help sounding like an actuary

[SteveH]

I recevied a proposal for a DB / DC combo plan that to my estimation is horribly incorrect. At the very least it is extremely agressive. I put down my thoughts on what I thought was wrong and now I have received back some explanations of why the person that put it together thinks it is correct.

Now I need a little help proving that it is wrong. If anyone wants to help that would be great. I've been in this pension world for a number of years, but I can't recall all the code sections that apply. I typically know the answer, but for some reason I have a hard time remembering what section it actually refers to.

- The actuary is assuming increases in the dollar limits of 5% per year form now until forever.

- He is using a 3% interest assumption with a -9 setback.

- The plan specs lists a retirement age of 65, but he is using a funding assumption that the owners will retire in 10 years.

- He claims this is a floor offset where none of the employees need to receive a DB contribution, because they all receive a 5% DC contribution.

- He claims the gateway test passes with the 5% DC contribution to the employees.

The owners are 34 and 36 and receive over $150,000 in contributions each to the DB plan. The employees receive nothing in the DB plan. He claims the plan passes discrimination testing. There are about 15 employees, 2 of which are yuonger than the owners, but not a whole lot younger.

Now I think this plan stinks left right and all over. But we are at the point where I say it doesn't work and he says it does. I think at the ver yleast this is the most aggressive plan I have ever seen that needs at least 7.5% in the DC for gateway, and I think he only tested the DC plan and diregarded any DB contribution that the owners received in his discrimination testing.

So any thoughts on what revenue ruling or something I can point to that at least shows you can not assume increases in the dollar limits? I can't tell him he can't use a 3% interest rate assumption or an assumed 44 retirement age. it may be nuts, but I can't tell him he is wrong. At least I don't think I can.

[Mike Preston]

You are right, he is wrong. How's that? Gateway rules call for 7.5% unless he can show that the ECAR for the HCE's is no more than 25%. Highly unlikely. Just because you aren't an actuary doesn't mean you aren't able to tell your client that a 3% interest assumption and a 9 year setback on mortality is likely to be challengable by the IRS (you didn't specify the mortality table, so I guess A37 with 9 year setback is reasonable ).

If you really think it doesn't work, just one bit of advice: decline to work on said plan.

[mwyatt]

Ask him how the scheme will work in 2008 with the new funding rules. Just because it comes out of a computer doesn't make it so (and we wonder why the IRS gets on its high horse every once in a while with stuff like this being pushed out on the market place).

Better yet, ask what happens in 5 years when these people decide to terminate and expect to actually get all of this money they put in back out, given the 415 limits on lump sums.

OT, can't resist this from ESPN's TMQ:

Hope for the actuarial profession

[John Feldt ERPA CPC QPA]

If you want to just pick the gateway issue, then go to 1.401(a)(4)-9. You can look specifically at:

1.401(a)(4)-9(b) Application of nondiscrimination requirements to DB/DC plans

go to 1.401(a)(4)-9(b)(2)(v)(D)(1) and (2):

(1) General rule. --A DB/DC plan satisfies the minimum aggregate allocation gateway if each NHCE has an aggregate normal allocation rate that is at least one third of the aggregate normal allocation rate of the HCE with the highest such rate (HCE rate), or, if less, 5% of the NHCE's compensation, provided that the HCE rate does not exceed 25% of compensation. If the HCE rate exceeds 25% of compensation, then the aggregate normal allocation rate for each NHCE must be at least 5% increased by one percentage point for each 5-percentage-point increment (or portion thereof) by which the HCE rate exceeds 25% (e.g., the NHCE minimum is 6% for an HCE rate that exceeds 25% but not 30%, and 7% for an HCE rate that exceeds 30% but not 35%).

(2) Deemed satisfaction. --A plan is deemed to satisfy the minimum aggregate allocation gateway of this paragraph (b)(2)(v)(D) if the aggregate normal allocation rate for each NHCE is at least 7 1/2% of the NHCE's compensation within the meaning of section 415(c )(3), measured over a period of time permitted under the definition of plan year compensation.

There's a lot more reading than that to do, but this may help.

[AndyH]

ttott, what are the proposer's qualifications? You say he is an actuary. Are you sure? I doubt it. Can you get premission to scan/redact/post the proposal?

This could be a WOW or just a Fugly.

My impression is that the 412(i) crowd shifted to reverse mortgages, then subprime mortgages, and is now shifting to DB/DC combo proposals.

[tymesup]

404(j)(2) NO ADVANCE FUNDING OF COST-OF-LIVING ADJUSTMENTS. - For purposes of clause (i), (ii) or (iii) of subsection (a)(1)(A), and in computing the full funding limitation, there shall not be taken into account any adjustments under section 415(d)(1) for any year before the year for which such adjustment first takes effect.

I'm under the impression that PPA lets you project one year's worth of 415 increase, although I can't find the reference right now.

[JAY21]

I agree with Andy. Smells like a 412i offset arrangement or something along those lines.

[SteveH]

Well there is no insurance involved with the plan at all. It is pretty amazing what type of contribution spits out for a 34 year old when you assume a 9 year set back, a 3% interest rate and a retirement age of 44. Maybe I will try to post the Datair print out. I suppose if I black out all the names then there shouldn't be any trouble. I can't imagine there is any way I would get permission to post it. Hell I wouldn't want my work posted for the whole world to critique.

[John Feldt ERPA CPC QPA]

A retirement age of 44? Hmmm. That could be ok, but you'll want to look at T.D. 9325, "Distributions From a Pension Plan Upon Attainment of Normal Retirement Age" from May 22, 2007.

http://benefitslink.com/taxregs/E7-9643.pdf

[AndyH]

Why not NRA 24 and -3% interest with a 5% COLA and J&100% or is that too 80's?

[tymesup]

Mix in a 20 year certain annuity with the J&S. A salary scale is explicitly reasonable. The benefit should be over 100% of comp, cause Social Security is going down the tubes.

Assume the employer is going to hire more people and start funding them now.

Do an end of year valuation and fund over the number of years to retirement age. Better yet, accrue the entire benefit immediately and use the unit credit funding method.

Don't forget to add 45,000 for profit sharing. And 15,500 for 401k. And 5,000 for catch-up.

[AndyH]

"Just add water, stir in lime."

[SteveH]

so you saw the same proposal I did then