Split-Funded Plans post PPA 06

[JAY21]

Anyone have any practical thoughts on what we'll be doing with split-funded plan with whole life insurance as part of the overall contribution ? PPA 06 minimum and maximums have their statutory funding method that doesn't project benefits (beyond a salary scale) to NRA where we'd normally subtract out the guaranteed CSV and fund the side fund for the difference.

Maybe we just continue to run it in Ind. Aggregate/ILP or some pre- PPA 06 projected funding method but just have the minimum and max calculated as required under PPA 06 ?

I guess I was hoping to work with the PPA 06 funding method, without having to run a separate valuation with a PPA 06 overlay for mins and max, but I'm not sure I can see how to do that. Any thoughts ?

[tymesup]

A nugget from Jim Holland at the ASPPA conference:

Q. Can a defined benefit plan still be split-funded using life insurance?

A. This will be discussed in future proposed regulations. However, it is difficult to understand how insurance can be used because the Pension Protection Act requires that the plan be valued using market rates, and the insurance portion of the assets will be valued at insurance company valuation rates. Since split-funding uses a level funding method, and all plans now will be using the unit credit method, the current use of life insurance to fund a defined benefit plan may disappear. It may be possible to use “the envelope method.”

I think Jim is in left field to suggest insurance can't be used in a DB plan. I do agree we'll be using envelope funding.

You may want to check this thread:

http://benefitslink.com/boards/index.php?showtopic=37378

[Andy the Actuary]

Mr. Jay, there will be circumstances where you will want to continyue to determine costs under "antiquated" but actuarial sound methods.

For a stable group covered under a final pay plan, TNC will increase due to passage of time and could at some point become obnoxious. In such case, it would make sense to advise the client upon adoption of PPA funding that minimum funding could lead to pushing costs to into the future. Perhaps, the client would want to continue advance funding on a more comfortable systematic basis to avoid this dilemma. Of course, we would have to advise the client that just because you create a credit balance does not mean you'll necessarily be able to use it!

[mwyatt]

Andy, I'm thinking of continuing my current methodology as well for the client, at least as a benchmark for a reasonable contribution figure. Hard to forget that not so long ago, the IRS proclaimed that Unit Credit for a salary-based plan was not a reasonable funding method.

[SoCalActuary]

Unfortunately, Congress and the FASB declared Unit Credit as the only valid method. And they have more votes.

[david rigby]

...Congress and the FASB declared Unit Credit as the only valid method...

Not quite. UC will be required in 2008 and beyond for purposes of determining minimum and maximum. This does not preclude any other method for other planning/budgeting purposes. This may be what myatt intended by his phrase "...continuing my current methodology as well for the client..."

Sad to think that the excellent text books by Barnet Berin and Arthur W. Anderson will no longer get much use.

[JAY21]

Guess our insurance friends might not be able to hype that stuffing max insurance will increase the DB deductible contributions. What a shame......