Valuation and Compensation

[retbenser]

Is is possible to use the 2010 compensation to determine the 2010 maximum contribution for sole proprietor and partnership?

Most likely, we cannot use the compensation to calculate the 1/1/2010 FT; but can we use the compensation to determine the TNC?

The argument FOR using the compensation is that the 2010 deductible amount must reflect the 2010 compensation; the larger the compensation, the larger the deductible acmount.

Of course, using the compensation will delay the valuation for one year (2011) and create AFTAP problem.

[Effen]

If you are doing an end of year valuation, then yes. If not, then probably no, but others will argue.

Clearly if your valuation date is 12/31/10, then you can use the current year's comp. However, if your valuation date is 1/1/2010, the IRS will argue that you cannot use the 2010 comp because you can't possibly know what it will be on 1/1/2010.

However, at one time it was a fairly common practice to due BOY vals using EOY comp, but the IRS has stated on a number of occasions that this is not proper. I think most have stopped doing it, but I know of a few who still use the practice.

[SoCalActuary]

For valuations performed as of the beginning of the year, or even for mid-year valuations of small plans, you do not have the factual data to know the end of year compensation.

So you ask the client what their expected compensation will be for the year, and use your good judgment to determine the cost. Or, you take last year's actual compensation and make your own projection of the expected costs.

As an alternative for small plans, you wait for actual end of year compensation and use asset smoothing to develop the end of year actuarial assets, giving you something very similar to using a beginning of year asset method.