Eliminating Lump Sum Option

[Andy the Actuary]

A Plan was frozen in 2006. The 2008 AFTAP was 80%. The EA has taken the position that he will issue no AFTAP certification until the employer requests. The employer makes no such request (ever!). As of 4/1/2009, the plan is presumed to be 70% funded and the AFTAP is deemed to be 70%. Employees are notified by 4/30/2009 that lump sums are restricted to 50% as of 4/1/2009. As of 10/1/2009, the plan is deemed to be less than 60% funded since no AFTAP certification has been issued. Employees are notified by 10/31/20090 that lump sums are not available. Thereafter, employees are notified by April 30 that the lump sum option is not available.

The employer has effectively eliminated lump sums without violating 411(d)(6) even when the plan's actual AFTAP may be greater than 80%.

Apart from employee relations problems, does anyone see any legal problems in this process?

[Guest DBPension]

A Plan was frozen in 2006. The 2008 AFTAP was 80%. The EA has taken the position that he will issue no AFTAP certification until the employer requests. The employer makes no such request (ever!). As of 4/1/2009, the plan is presumed to be 70% funded and the AFTAP is deemed to be 70%. Employees are notified by 4/30/2009 that lump sums are restricted to 50% as of 4/1/2009. As of 10/1/2009, the plan is deemed to be less than 60% funded since no AFTAP certification has been issued. Employees are notified by 10/31/20090 that lump sums are not available. Thereafter, employees are notified by April 30 that the lump sum option is not available.

The employer has effectively eliminated lump sums without violating 411(d)(6) even when the plan's actual AFTAP may be greater than 80%.

Apart from employee relations problems, does anyone see any legal problems in this process?

With the crash in the market, a reduction in 2009 AFTAP would be expected, and with the 2008 AFTAP=80% a Lump Sum restriction in 2009 is expected (even if is WAS calculated ... as NOT done in your example). What I'm getting at is ... there are no red flags .... nothing "smells bad" for participants to get "litigious", at least now until the market recovers and the participants wonder why they STILL cannot get lump sum payouts.

Had the market had remained flat and the 2009 AFTAP expected to remain >=80%, a deliberate attempt to restrict lump sums via non-Certification of a 2009 AFTAP smacks of abuse (and potential litigation) ....... at least it should to an informed participant wanting a lump sum (AND to his lawyer).

It would seem advisable for the EA to have lots of paper supporting his/her unofficial estimate, clearly informing the Plan Administrator of the (potentially bad) implications of non-Certification. A conversation with his/her own lawyer might be a good idea as well.

[Andy the Actuary]

Agree with all of your comments. Not certifying the AFTAP to deny lump sum payments was certainly not the intention of PPA. Deeming the plan to be less than 60% funded was no doubt intended as a punishment rather than a desirable consequence.

No doubt, 1,000 words will be written to close this loophole and in so doing, will open up others. A bad law by any other name is still a bad law.

[Guest DBPension]

Agree with all of your comments. Not certifying the AFTAP to deny lump sum payments was certainly not the intention of PPA. Deeming the plan to be less than 60% funded was no doubt intended as a punishment rather than a desirable consequence.

No doubt, 1,000 words will be written to close this loophole and in so doing, will open up others. A bad law by any other name is still a bad law.

Another thing to keep in mind (which make a delay risky for the Plan Administrator, and possibly the EA) is that for the next 3 years (through 2012 while the lump sum interest rate basis is still grading into the 100% 3-segment Corporate Bond rate from the 30-yr Treasury) there is a built-benefit to the Plan via SMALLER lump Sum payouts (assuming the underlying interest rates do not change). And, with the current (last few month) very wide Corporate-to-Treasury spread, this "benefit" has been running at about 55-60 basis points PER YEAR of delay in lump sum payout. A delay intended to realize this benefit could certainly be looked at as abusive. For a participant age 60, EACH YEAR OF DELAY in lump sum payout, with an associated interest rate increase of 55-60 BP, translates roughly into a 5% decline in lump sum payout .... a substantial incentive for a less than earnest Plan administrator.

[david rigby]

IMHO, this situation will attract calls of "abuse", and may attract legislation.

However, it appears to conform with the actual words of the statutes; I believe it does not violate either PPA or 411.

[tymesup]

If the AFTAP is deemed below 60%, accruals are frozen, affecting participants. If the plan is well-funded, there may not be any deductible contributions available. If the plan sponsor is OK with the above, this could work.

Is a plan sponsor going to think of this on their own? Not likely. The EA might want to check with their E&O carrier before suggesting this idea to the plan sponsor.

[david rigby]

There may be a couple of other issues to consider:

- Is there a collective bargaining agreement? For example, a CBA could have language that requires the ER to provide all information to the EA in a timely manner so that a AFTAP can be certified by October 1.

- There was considerable discussion at this year's EA meeting (as well as on this discussion boards) along the lines of Andy's first post (ie, the EA should not certify anything until the PA requests the certification). Suppose the EA has all the information needed to do a certification, but does not do so because the PA has not requested it. Could that, in any manner, imply the EA has "failed" to do his/her duty on behalf of the plan participants? (Litigation, anyone?)

[Guest DBPension]

There may be a couple of other issues to consider:

- Is there a collective bargaining agreement? For example, a CBA could have language that requires the ER to provide all information to the EA in a timely manner so that a AFTAP can be certified by October 1.

- There was considerable discussion at this year's EA meeting (as well as on this discussion boards) along the lines of Andy's first post (ie, the EA should not certify anything until the PA requests the certification). Suppose the EA has all the information needed to do a certification, but does not do so because the PA has not requested it. Could that, in any manner, imply the EA has "failed" to do his/her duty on behalf of the plan participants? (Litigation, anyone?)

There may be a couple of other issues to consider:

- Is there a collective bargaining agreement? For example, a CBA could have language that requires the ER to provide all information to the EA in a timely manner so that a AFTAP can be certified by October 1.

- There was considerable discussion at this year's EA meeting (as well as on this discussion boards) along the lines of Andy's first post (ie, the EA should not certify anything until the PA requests the certification). Suppose the EA has all the information needed to do a certification, but does not do so because the PA has not requested it. Could that, in any manner, imply the EA has "failed" to do his/her duty on behalf of the plan participants? (Litigation, anyone?)

Extreme examples often help clarify the issue (the "issue" being ... could the EA be held liable, complicit, etc.), so lets make one up:

Suppose the 2008 AFTAP was 110%, and effective 4/01/09 the as-yet-uncertified 2009 AFTAP automatically becomes (110-10=) 100% so (from 4/01/09 through 9/30/09) there is still no lump sum restriction in place for 2009 payouts. Also suppose that in the July-Aug 2009 the EA's unofficial 2009 AFTAP is determined to be 85% or say 75% (only the latter resulting in the 50% restriction) and communicates this with all its implications to the Plan Administrator. And, via conversation with the EA, the Plan administrator learns that a non-certification by 10/01/09 results in a 2009 AFTAP<60 with no lump sum payouts allowable and a plan freeze ... AND the plan administrator thinks THIS would be a great result (for his company), doesn't particularly care about emplyee relations issues, and tells the EA to do NOTHING.

If the plan administrator's mind cannot be changed, the only option that seems reasonable for the EA (to not be dragged into litigation, even though NOT of his own making) is the document to the plan administrator the consequences of his actions and resign the engagement BEFORE 9/30/09. Who really wants a client like this anyway.

[Andy the Actuary]

I spoke at the EA meeting with one of my former colleagues at Towers Perrin. He indicated their position is not to issue a certification until requested. Now, I realize TP plays in the Fortune 500 market whereas many of us play in the Forunte 500,000 market and quite often there is not expertise at the other end of our telephone. However TP's exposure is greater than ours and I'm willing to follow this giant's lead.

I agree being party to abuse is not desirable. Once could see an extreme where no certification would be issued until the AFTAP exceeded 110% so that HCEs could get their distributions. And note the problems that occur when a participant reaches normal retirement age and the Plan states pension payments must begin.

In the particular situation, the client does not want to be selling off depreciated assets to pay lump sums. It is interesting that an affordable contribution would get the AFTAP to 80%. It is further ironic that the employer had modified the Plan nearly 10 years ago to eliminate the lump sum option and was disappointed to learn that this elimination would apply only to future accruals. Now, the PPA et al. come along and provide a possible path to lump sum elimination.

So, now the big question. Those denizens of our nation's capitol who pen the manifold of regulations are pretty pensive and smart folk. Could it be possible that their failing to address non-certification is intentional so that lump sums distributions could be suppressed while assets were depleted or was it merely because PPA cited no remedy for non-certification?

[ak2ary]

It seems to me that the schedule SB contains all the info required in an AFTAP certtification and may very well be considered to be one

[Andy the Actuary]

It seems to me that the schedule SB contains all the info required in an AFTAP certtification and may very well be considered to be one

Interesting thought. However, the proposed regs state, "The enrolled actuary’s certification of the AFTAP for a plan year must be made in writing, must be provided to the plan administrator, and must certify the plan’s AFTAP for the plan year."

Are you suggesting that because the Plan Administrator signs the 5500, you have complied with the notification by virtue of signing an SB? The "in writing" requirement seems like a stretch.

[dmb]

Extreme examples often help clarify the issue (the "issue" being ... could the EA be held liable, complicit, etc.), so lets make one up:

Suppose the 2008 AFTAP was 110%, and effective 4/01/09 the as-yet-uncertified 2009 AFTAP automatically becomes (110-10=) 100% so (from 4/01/09 through 9/30/09) there is still no lump sum restriction in place for 2009 payouts. Also suppose that in the July-Aug 2009 the EA's unofficial 2009 AFTAP is determined to be 85% or say 75% (only the latter resulting in the 50% restriction) and communicates this with all its implications to the Plan Administrator. And, via conversation with the EA, the Plan administrator learns that a non-certification by 10/01/09 results in a 2009 AFTAP<60 with no lump sum payouts allowable and a plan freeze ... AND the plan administrator thinks THIS would be a great result (for his company), doesn't particularly care about emplyee relations issues, and tells the EA to do NOTHING.

If the plan administrator's mind cannot be changed, the only option that seems reasonable for the EA (to not be dragged into litigation, even though NOT of his own making) is the document to the plan administrator the consequences of his actions and resign the engagement BEFORE 9/30/09. Who really wants a client like this anyway.

In this situation i believe the actuary must certify the AFTAP by 9/30 at the latest, but realistically the AFTAP should be certified when calculated and after a reasonable time period after the employer has been provided options regarding the AFTAP. The certification should not be delayed simply because the employer wants it delayed. IMHO the actuary will be held liable if the actuary does not issue certified AFTAP solely on employer's request.

[Andy the Actuary]

Instructions to Schedule SB indicate enter the AFTAP as calculated blah, blah, blah. The instructions did not provide "as specified on the actuarial certification of the AFTAP." I'm concerned about this tacit certification because it makes it incumbent upon the plan administrator both to read and understand Schedule SB, which is unlikely. Should your cover letter to the 5500 now stipulate that the p.a. should read Schedule SB as this constitutes your certification of the AFTAP whether or not the p.a. and employer agree with the consequences?

We'll simply need to agree to disagree on this issue, which is no problem since we aren't on each other's Christmas card list.

I'm in agreement with you about the inference I draw from your comments: The EA must be comfortable with the processes and methods and should walk away if not.

My personal preference is to seek legal counsel and to ensure client understands potential ramifications (locusts, plague, and pension prison) of not authorizing EA to certify. Then, I face Mecca and pray that final IRS regulations will address this issue.

Thanks for your comments.

andy t.a.