PPA -- Change to fractional accrual method?

[JRN]

Our DB Plan provides that the accrued benefit as of the close the plan year is equal to the participant's projected retirement benefit multiplied by a fraction: numerator = years of participation, and denominator = total years of participation at NRA. We are now seeing the accrued benefits of several participants increase substantially from year-to-year. Our actuary advises that the reason for the increase is because under PPA the accrued benefit must now be accrued over no more than 10 years. In other words, the denominator in the accrual fraction cannot exceed 10. Is this correct? I certainly understand that PPA changed the manner in which benefits must be funded. But, did PPA also change the manner in which benefits can be accrued?

This is important now because we are considering terminating our Plan and we need to know how much we owe Plan participants. Thank you.

[Mike Preston]

PPA did not change the way that benefits are accrued.

[Andy the Actuary]

Have you seen a Plan amendment to this effect?

I would suggest you request your actuary to articulate his/her position in an email, citing the applicable Internal Revenue Code Sections.

It sounds as if there may be some miscommunication or misunderstanding here.

[Lou S.]

I agree PPA changed the funding rules not the accrual rules. Is it just that required contribution has gone up? That is possible depending on your pre-PPA funding method and probable given the market experience in 2008.

[JRN]

I agree PPA changed the funding rules not the accrual rules. Is it just that required contribution has gone up? That is possible depending on your pre-PPA funding method and probable given the market experience in 2008.

Lou, It's not just that the contribution has gone up (which it has). It's that the amount we are being advised we owe the Plan participants has gone up substantially too because the actuary is saying that the participants must accrue their benefit faster under PPA. That's what we are questioning.

P.S. I appreciate that this stuff is complicated and I appreciate the job the actuary has done. But, I just wanted to get a "second opinion" on his application of PPA. Thanks.

[SoCalActuary]

I agree PPA changed the funding rules not the accrual rules. Is it just that required contribution has gone up? That is possible depending on your pre-PPA funding method and probable given the market experience in 2008.

Lou, It's not just that the contribution has gone up (which it has). It's that the amount we are being advised we owe the Plan participants has gone up substantially too because the actuary is saying that the participants must accrue their benefit faster under PPA. That's what we are questioning.

P.S. I appreciate that this stuff is complicated and I appreciate the job the actuary has done. But, I just wanted to get a "second opinion" on his application of PPA. Thanks.

If the plan was failing its non-discrimination test, the actuary may have implemented a new amendment to correct the problem. Or if the plan had a low formula and it became a top-heavy plan, then the accrual during the first 10 years makes sense.

Was the plan top-heavy? Was an amendment made?

[david rigby]

I think SoCal is onto something. PPA did not change accrual rules, but it may have been a convenient excuse to fix some flaw in the plan.

[Blinky the 3-eyed Fish]

Ask the actuary to explain in detail what he is talking about and post his response (not his name). Then we can dissect it. It will be like science class.

[Lou S.]

I agree PPA changed the funding rules not the accrual rules. Is it just that required contribution has gone up? That is possible depending on your pre-PPA funding method and probable given the market experience in 2008.

Lou, It's not just that the contribution has gone up (which it has). It's that the amount we are being advised we owe the Plan participants has gone up substantially too because the actuary is saying that the participants must accrue their benefit faster under PPA. That's what we are questioning.

P.S. I appreciate that this stuff is complicated and I appreciate the job the actuary has done. But, I just wanted to get a "second opinion" on his application of PPA. Thanks.

As others have said, ask for an expalination from the actuary. Is this a small plan that has had a demographic change? Maybe the formula passed testing with the old demographics but they you got a bunch of new participants that made it diffcult to pass testing without a change in the formual?

Without the facts it is all guess work.

Also is it the monthly accrued benefits that have gone up or just the PVABs (single sum payout amounts)? Could be a spike due to the low interest rate environment and high 417(e) payouts.

[FAPInJax]

It could also be that all the participants are generating TH benefits (which are 'accrued' over 10 years)