Takeover Plan

[Andy the Actuary]

The Widget Company Pension Plan's calendar year 2008 Schedule SB was signed by the sole practioner Enrolled Actuary Heezer Stump. The 2008 5500 was filed in Marhc 2009. Unfortunately, Irving is serving a lifetime sentence in solitary confinement in ADX in Colorado for speaking his peace at the 2009 EA meeting.

I am unable to reproduce his 2008 results contained in his actuarial report, coming up with a 15% higher FT and 10% higher TNC. There are no pre-retirement decrements.

What are the options for going forward.

(1) Apply for change in cost method?

(2) Do nothing -- There is no change in cost method since law prescribes cost method and interest/mortaltiy assumptions?

(3) Advise client must redo 2008? If so, does this mean I would need to match 2007 elements within 5%? I couldn't use 2000-40 since 2007 Schedule B has already been filed?

(4) Go about merry way and ask Blinky to prepare an attachment for me to affix to the 2009 Schedule SB?

(5) There is no answer -- the words of 2000-40 (takeover plans) refer to concepts that no longer apply under PPA?

(6) View this example as an omen that it is time to find a better way to make a living?

[david rigby]

... a 15% higher FT and 10% higher TNC. There are no pre-retirement decrements.

A few random thoughts:

- could the "error" be that pre-ret decrements were used, but not properly documented?

- any possibility that you valued TH minimums but they were previously omitted?

- is at-risk part of this analysis?

[Andy the Actuary]

Let us unrealistically assume that no reader (other than Heezer Stump) would find issue with my calculations. Let's also assume that I am using same data to reproduce 2008 as Heezer used. In short, Heezer made up numbers, but this is not a very intelligent assertion to make publicly nor does it justify the future course of action.. The question is given no living (or dead) EA could replicate Heezer's calculations, what's the best way to proceed?

Obviously, this example is made up, but we will face takeovers where we won't be able to replicate the prior year and the prior actuary is uncooperative.

[SoCalActuary]

I have been on both sides of this issue, based on facts & circumstances.

If the prior actuary could legitimately defend their position, then I don't usually advise the client to redo the work.

On the other hand, if I believe that the prior work was not defendable, then I advise the client of the audit risk.

This includes any situation where I have found the work was forged or fraudulent, or based on a complete failure to follow existing law.

[Andy the Actuary]

I have been on both sides of this issue, based on facts & circumstances.

If the prior actuary could legitimately defend their position, then I don't usually advise the client to redo the work.

On the other hand, if I believe that the prior work was not defendable, then I advise the client of the audit risk.

This includes any situation where I have found the work was forged or fraudulent, or based on a complete failure to follow existing law.

It is frightful to say, there indeed once was an EA who conjured up numbers. Each year the plan provisions and assumptions changed. I was asked to take over the work but declined knowing that I would not be able to rely on any past B's and understood to fulfill my professional obligation would likely have to redo from day one. This is fine if it is the IRS who is telling the client it must be done; bad, if you are the new EA and bringing it up.

[SoCalActuary]

One of my past engagements was similar to this. I went in to takeover the plan, and noted that the prior two B's did not match, so I warned them that this plan cound be audited. Less than a week later, they did indeed receive the audit letter, so we had to go back and revise 4 years of back administration.

It was a big job, involving crossed investments, discrimination, loans to the company that were unpaid, a falsified Schedule B, etc. But the client knew they had a problem even before the audit letter arrived, and after we presented all the work, they did pay for all the work we did.

[Blinky the 3-eyed Fish]

I just received an email that ASPPA needs your technical questions now for the 2009 ASPPA Annual Conference. This seems like a good one to me.

I don't know if 2000-40 applies anymore or not and haven't had to make that call yet. (No 2009 takeovers DB plans yet.)

[JBones]

Curious if anyone has come across a real world example of this topic yet.

I have a takeover plan that was effective 1-1-08 and I am now responsible for the plan for the 2009 year going forward. I cannot match the prior actuaries numbers and have found some absolute mistakes as well. The contribution made definitely met minimum funding and was below the deductible limit.

In order to run the 2009 val, I am not sure if I should:

-Redo the 2008 valuation and use that as my starting point for 2009 or

-Use the shortfall amortization and prefunding balance from the prior actuary while running the 2009 valuation.

[Mike Preston]

If you believe there are errors in the prior year valuation, you should let the client know and ask the client how they want you to proceed. If they don't authorize you to redo the 2008 work, I don't see how you can do it. If that is their decision, then you have to decide whether to resign or just go forward (your second option). You can have the client sign something that holds you harmless by just going forward, but I'm not aware of any specific case law that says you will really have protection if they do.

Whether they authorize you to redo 2008 or not you still have to decide whether you contact the prior actuary to determine whether what you think is a mistake isn't. IMO, you should seek the client's authorization before you contact the prior actuary, as there may be circumstances of which you are unaware.

I would proceed much more cautiously, though, if the client doesn't want you to contact the prior actuary.

And, finally, with only one year in the can, I would push the client to authorize you to re-do 2008 as otherwise they might be on the hook for redoing many years if it turns out that 2008 provided an erroneous base for 2009 and forward calculations.

[ak2ary]

Of course, if you believe the prior valuation to be wrong but are also certain that had the valuation been done right, the contribution would have been more than the minimum and l;ess than the maximum, you could use the 2008 val as a starting point if the client waives the entire credit balance..then you wouldnt have to worry about your opening credit balance being wrong

[Mike Preston]

True, but what about that shortfall amortization? Or should we be happy with 1/2 a loaf in this instance?