Can't we simplify this mess?

[ScottR]

As I sat thru various sessions at the ASPPA Conference, it occurred to me that the PPA funding rules are fundamentally sound. i.e. min contrib is based on the value of current year's accrual, plus amortization of any existing shortfall.

But things went awry in the details, and we're left with a stunningly confusing and unworkable system. I get the sense that the IRS and other govt officials are as confused and frustrated as many of us are.

I'm thinking we should take a proactive approach, and draft a comprehensive proposal to simplify the system. Just a few ideas off the top....

- Trash the Effective Interest Rate concept, and substitute the middle segment rate.

- Trash the adjustment of COB/PFB for actual investment earnings, and use the middle segment rate.

- Trash the concept of 1/2 lump sums for 60%-80% AFTAP. Switch to no LS's if < x%, and full LS's if > x%.

- Simplify or trash the Annual Funding Notice, which gives a ridiculous amount of useless info to the participants.

- Trash the concept of deemed AFTAPs on 4/1 and 10/1 each year, and the associated notices to participants.

etc. etc.

Any thoughts?

.. Scott

[Andy the Actuary]

If you gotta have segment rates, your suggestion of using 2nd (or even first or third) segment rate as a proxy for the effective interest rate is wunderbar. You have my vote as king. However, to the contrary, I have found the annual funding notice to be invaluable -- in particular, for adequately covering the bottom of my bird's cage.

Yes, how about trashing PPA which depending upon the situation may or may not be fundamentally sound (e.g., static population will produce escallating TNC). Tieing to yeild curve and not to investment expectations leaves an unsettling feeling. Again, that interest funding interest rates differ in determination and possibly from timing of determination of 417(e) rates demonstrates that we are going through a lot of mechanical gyrations not to hit a moving target. The one-size fits all mortality table is a total joke.

That Congress has come back several times with relief demonstrates that they place little faith in what they created. However, they march proudly that they have fixed the pension system.

Now if you step down as king and I am elected king, here is what I will do to revitalize the DB system [repeat of Feb 20, 2009 post].

(1) Outlaw FASB158 for forcing employers to post liablilities for benefits not even earned and boxing employers into a corner by mandating the fiscal year end measurement date.

(2) Reinstitute 10 year vesting and graded 15 year vesting with provision for new schedule to apply to future accruals (from hire date)

(3) Allow plan to specify fixed interest rate and mortality table for lump sum benefit calculation using standard interest rates and mortality tables. This could be adopted without grandfather

(4) Eliminate top-heavy rules.

(5) A plan sponsor who in every year contributes no more than the PPA minimum (w/o regard to FSCOB) will not be subject to reversonary excise taxes upon plan termination.

(6) Eliminate quarterly contributions except possibly for the very large, unfunded plans.

(7) All PPA elections are deemed made by the plan administrator's signing the 5500.

(8) Eliminate the PBGC risk premium for plans with unfunded vested liabilities of less than $x million.

(9) Rescind PPA accelerated benefit restrictions except for "key" employees (HCEs would still be limited by 401(a)(4)).

(10) PPA amortization would be changed to 15 years.

(11) Inform all government bodies that their role is to audit and not to punish.

(12) Eliminate spousal consent requirements (or alternatively, allow cigar smoking in government buildings).

(13) Get rid of the yield-curve crud.

(14) Eliminate every other burdensome and uncessary requirement I haven't thought of.

As stand-up comic Buddy Young Jr. [billy Crystal] admonished his audience in the movie Mr. Saturday Night, "Don't get me started.

"

[Guest RBlaine]

I'd be happy with just a few changes:

1. Ridiculous COB/PFB rules. I have yet to determine how to adequately explain it to a client where I think he/she understands.

2. Stupid relief rules that only apply for plan years beginning xx/xx/xxxx and ending xx/xx/xxxx + ?. What happens when, five years from now, the market drops another 35-40%? More relief legislation has to be begged for, drafted and added onto some crap legislation. As Andy quoted, "Don't get me started". If the funding requirements were really THAT good of an idea we wouldn't need all of this relief.

3. I'd agree that the LS restrictions should apply to key/HCE only.

OK, there are more I would like to see...

[mwyatt]

I'll only say this: the PPA minimum funding method for a salary based plan was deemed an unreasonable funding method (pure Unit Credit) prior to 2008 by the IRS. So what does that say as to PPA?

[ScottR]

Thank you all for your replies. I'm starting a list to be presented to ASPPA, and with their help, to govt officials. I honestly feel the IRS/DOL will be receptive to simplification, as they are really struggling with the current mess (as we are). As you come up with other ideas, please post them and I'll add them to the "list".

Thx,

Scott

[david rigby]

I honestly feel the IRS/DOL will be receptive to simplification...

Scott, I salute your efforts. However, IMHO, govt EEs (whether elected or bureaucratic) are rarely receptive. More frequently, their mindset is the opposite. Remember, we spell it "simplification", but in DC they spell it "complification".

I also salute all (OK, most) of the suggestions above. (Nice to know we can appoint ourselves as king, if only for a moment.) I add one more: get rid of the PBGC; failing that, permit a plan sponsor to pay zero premium if plan funding is sufficient to pay all promised liabilities.

[Blinky the 3-eyed Fish]

permit a plan sponsor to pay zero premium if plan funding is sufficient to pay all promised liabilities.

Isn't that the same as arguing for paying $0 premium for term life insurance if you didn't die that year?

[david rigby]

Isn't that the same as arguing for paying $0 premium for term life insurance if you didn't die that year?

Not at all. It's my way of saying "there is no insurable event!"

(I've ranted on this before, so I'll spare you the repeat.)

[Guest RBlaine]

I honestly feel the IRS/DOL will be receptive to simplification...

Scott, I salute your efforts. However, IMHO, govt EEs (whether elected or bureaucratic) are rarely receptive. More frequently, their mindset is the opposite. Remember, we spell it "simplification", but in DC they spell it "complification".

I also salute all (OK, most) of the suggestions above. (Nice to know we can appoint ourselves as king, if only for a moment.) I add one more: get rid of the PBGC; failing that, permit a plan sponsor to pay zero premium if plan funding is sufficient to pay all promised liabilities.

How about allowing plans to opt out of PBGC coverage? In order to avoid folks doing that just because they don't want the expense of the premium, increase contribution requirements by the approximate premium amount or something like that.

I'm definitely onboard with removing quarterly requirements or, at the very least, lowering the threshold for when they are required from 100% funded. Maybe only require quarterly contributions for PBGC plans.

[Guest Spock]

I agree with most of the points but not the suggested switch back to longer vesting periods. We live in a transient world and people work multiple jobs during their career, often for less than ten years, and often through no fault of their own.

Congress writes laws, quasi gov't agencies write regulations, and the consulting world tries to figure out ways to beat the system. The better you are at it the more money you make. Then Congress writes more laws, quasi gov't agencies write more regulations, and on and on and on....