AFTAP elections

[AndyH]

Are actuaries generally requiring written elections from clients regarding PPA funding elections before signing AFTAPs for 2008?

I'm referring to asset method, phase in election, lookback month, etc.

Anybody willing to comment on how this process is generally being handled, i.e. formally or informally? Are there any advisories or published guidelines on this subject?

We're requiring formal elections in advance and I'm wondering if others are doing the same. Thanks for any comments.

[Andy the Actuary]

I am sending clients an email with attachment (see example attached) for plans where discussing the theoretical issues would be impractical.

Body of email:

The Pension Protection Act requires that the Plan Sponsor elect which set of 3 segment interest rates should be used to value Plan liabilities to determine minimum required contributions. The first interest rate is used to discount benefits payable within 5 years; the second interest rate is used to discount benefits payable in years 5 through 19; the third interest rate is used to discount benefits payable in years 20 and thereafter.

There are 11 choices of interest rates sets from which to select. Practically speaking, 10 because the 11th choice is to use an array of rates that vary by 1/2 year of distribution and I doubt you want to incur the expense to implement that (it's bad enough we have to use 3 rates!). These rates are shown under columns (4) and (5) for the months of Sep, Oct, Nov, and Dec of 2007 and Jan of 2008 at http://www.datair.com/rates.htm. I selected the 4th preceding month because it will be known the earliest and will facilitate planning for 2009. We are playing guessing games on whether or not to use the transition rates but it is only a two year transition as it goes away after 2009 so this is truly not a issue worthy of too much discussion.

Interest_Rate_Election.doc

[AndyH]

a.t.a., thanks.

You colorful client educational bulletins and forms clearly evidence enjoyment of the new law and regs. I can't wait to see the instructions to your quarterly client election forms that specify whether or not each quarterly contribution will be satisfied by use of the credit balance.

p.s. no election for mortality table or asset method I presume?

[Andy the Actuary]

Yes, Mr. Andy, the new law brings so much joy into my life. I haven't been so elated since the pigs ate my little sister.

PPA brings with it the following documentation issues regarding employer elections:

(1) Required employer elections (e.g., optional interest rates; quarterly contributions)

(2) Choices with no apparent required election (mortality table, asset valuation method)

(3) CYA

I typically scan these regs for the word "elect." This gives all references to where the employer has to make an election. I could not find any instances for elections being required in the examples in (2) and would appreciate if you would point out to me if I am in error.

When the employer does not have to make an election, what do you do, including for example, when the default interest rate applies. I leave this great conundrum to you. Question: What were you doing before PPA?

Here is my explanation email re; credit balances: At some point, you may wish to use a credit balance to reduce the current years obligation. You will be able to do this provided your plan was 80% funded last year. Do you remember that certification I sent you that you didn't understand. Well, that sort of tells you whether you can use a credit balance. I say "a" credit balance rather than "the" credit balance because there are at least two of them and more may arise if it becomes perceived that actuaries are finally getting a handle on how these animals behave. You will need to give me at least 145 days notice that you will use the credit balance because every number I have ever given you will change. My strongest advice is to just contribute the g.d. money and burn the credit balance. At this juncture, Webster has not introduced the nuance of "burning." In this case, it means to forfeit irrevecobly the use of this money which was attributable to your unsuccessful attempt to keep your plan well-funded by contributing more than was required.

[tymesup]

"Yes, Mr. Andy, the new law brings so much joy into my life. I haven't been so elated since the pigs ate my little sister."

Umm, they're called Porcine-Americans, now.