How Big Should the Cover Be?

[Andy the Actuary]

A client funded a whopping amount for their 2007 calendar year plan year to get the 2008 AFTAP to 80%. Hooray, they can distristribute lump sums to NHCEs through March 31, 2009. Of course, like all good Americans, their portfolio has decreased about 30% since January 1, 2008. Common story.

Now, unbeknownst to a long-term employee, they are terminating the employee this December. (Merry Christmas!) This employee is nearly 60 and eligible for early retirement and entitled to elect a lump sum under the terms of the plan. It is possible the employee may choose to defer receipt. I recommended that they should at least provide an election package. Further, they should tell the employee that lump sum payment may be restricted after March 31, 2009 and perhaps later as well. Finally, I advised they should consult their legal counsel regarding my non-legal-but-practical advice.

This begs the larger question. While not required by PPA, it is making more and more sense to provide annual communication to participants of even healthy plans that restrictions might apply at some later date -- even years down the road. This goes beyond simply burrying the potentially unpleasant news in the SPD, which in many instances will end up unread.

Has anyone taken the "preventive medicine" approach? If so, it would be appreciated if you could share the experience along with identification of the various poisons you have considered ingesting.

[Effen]

I was actually thinking the opposite; the plan might want you to declare it < 60% sooner so it wouldn't have to pay the lump sum. Either scenerio is possible.

Maybe it would make sense to add a statement in your "impact of not deferring" section of your election package. Since we must now explain the implications of taking a lump sum, it would seem a logical place to add such language.

I just hope no one in Congress reads this board, otherwise you may end up adding it to your already long list of required disclosures.

[Andy the Actuary]

I was actually thinking the opposite; the plan might want you to declare it < 60% sooner so it wouldn't have to pay the lump sum. Either scenerio is possible.

Maybe it would make sense to add a statement in your "impact of not deferring" section of your election package. Since we must now explain the implications of taking a lump sum, it would seem a logical place to add such language.

I just hope no one in Congress reads this board, otherwise you may end up adding it to your already long list of required disclosures.

Your point of certifying the AFTAP is well-taken. Now that I have enrolled in law school, I would opt to argue for the plaintif against whom the sponsor took action to deny payment of a lump sum.

Also, your "impact of not deferring" is an excellent suggestion and I will consider adding it to packages with the client's approval.

PPA is the worst piece of legislation since the rescinded TRA86 Sec 89. Hopefully, Congress is reading this board and will be engendered with the wisdom and courage to repeal it.

[dmb]

I was actually thinking the opposite; the plan might want you to declare it < 60% sooner so it wouldn't have to pay the lump sum. Either scenerio is possible.

Maybe it would make sense to add a statement in your "impact of not deferring" section of your election package. Since we must now explain the implications of taking a lump sum, it would seem a logical place to add such language.

I just hope no one in Congress reads this board, otherwise you may end up adding it to your already long list of required disclosures.

Your point of certifying the AFTAP is well-taken. Now that I have enrolled in law school, I would opt to argue for the plaintif against whom the sponsor took action to deny payment of a lump sum.

Also, your "impact of not deferring" is an excellent suggestion and I will consider adding it to packages with the client's approval.

PPA is the worst piece of legislation since the rescinded TRA86 Sec 89. Hopefully, Congress is reading this board and will be engendered with the wisdom and courage to repeal it.

Me and my fellow actuaries in my office had a discussion this morning regarding Effen's suggestion that a client may want to restrict lump sums. The question then became: If the 2008 AFTAP was over 90%, but it looks like the 2009 AFTAP could possibly be less than 60% or even less than 80%, when is the right time to certify the AFTAP. Do you certify the 2009 AFTAP simply because the employer doesn't want to pay lump sums??? As Effen mentioned, this could work in either direction.