430 Plan Expense Assumption

[Andy the Actuary]

It looks as if WRERA invoked the law of unintended consequences again:

Is any one doing anything more elaborate than assuming that current year's estimated expense is the same as prior year's actual expense? If so, how would you ever modify the assumption in the future without obtaining IRS approval?

This is an interesting subject. Assume frozen plan, no shortfall amortization charges apply, and suppose the expense assumption is CYE=PYA as described. Suppose 2008 expense -- all actuarial fees -- was 100,000 [i reduced my fees!] but client announces for 2009 and thereafter he will pay all expenses directly rather than out of Trust. So, TNC for 2009 is 100,000. Now, client must contribute 100,000 as minimum and must also pay 100,000 directly. To make matters worse, the 100,000 client contributes for 2009 is not an excess contribution so client does not enjoy PFB buildup.

Does this just fall into the category, "Ah, that's too bad" or am I missing something?

If I'm not missing something, then this particular client would be wise to always pay expenses from trust which is clearly not the IRS's intention.

The other side of this coin is suppose client has historically paid expenses (including investment management) directly. So, 0% expense assumption is appropriate. Client rolls around for a few years and continues to pay expenses directly. Now, client's business is in the potty so client decides to pay expenses from trust and the prospects are he will continue to do so. However, expense assumption is "0%." You can't change it without IRS approval. Are you required to request IRS approval or do you qualify your SB certification? Suppose client is unwilling to pay cost of obtaining IRS approval. Then what?

[SoCalActuary]

You might be over-playing this.

You make an assumption of the expected expenses. You can choose to use the prior history as that assumption. Sort of like assuming that last year's salary increase is your future salary scale. But you can change your assumption if it no longer looks reasonable.

That does not make it an actuarial cost method.

[Andy the Actuary]

You might be over-playing this.

You make an assumption of the expected expenses. You can choose to use the prior history as that assumption. Sort of like assuming that last year's salary increase is your future salary scale. But you can change your assumption if it no longer looks reasonable.

That does not make it an actuarial cost method.

I believe your comment is generally appropriate. I was mistaken about changes in actuarial assumptions always requiring IRS approval. This appears to apply to only significant assumption changes in PBGC covered plans. IRC Sec. 430(h)(5).

Thank you.