Reporting an Actuary to the ABCD

[Rball4]

Has anyone reported an actuary to the Actuarial Board for Counseling and Discipline (ABCD)? A friend who is an actuary told me of a DB plan they recently took over where the prior actuary seemed to be ignoring PPA. Sure, they were using the new Schedule SB rather than just the old Schedule B, but they clearly were using any interest rate they wanted, standard calculations were wrong (i.e. shortfall amortization calculations), and they were ignoring new rules such as the annual funding notices and benefit restrictions. When reading The Application of Precept 13 of the Code of Professional Conduct that the American Academy of Actuaries released last December, it appears that this actuary needs to be reported.

My friend is concerned that by doing so, the IRS will audit all of the prior actuary's plans. This could create a problem for his new client. Even though the plan has been cleaned up and is now functioning according to the law, an IRS audit usually creates a headache. So my questions are:

1) has anyone reported another actuary to the ABCD?

2) and if so did it create any problems for your clients?

Thanks.

[Andy the Actuary]

Question is will this out-of-touch actuary care?

There is a famous case of an EA who simply made up numbers to get the client whatever contribution the client wanted. The schedule B's were a mess and finally the Joint Board dis-enrolled this EA. Not to worry, the EA kept practicing and signing Schedule B's. Obviously, a "B" signed by a non-EA seemed tantamount to filing an incomplete 5500.

The real question is how far back should the "take over actuary" have to go to purify past sins? A number of years ago I was presented an opportunity to take over a DB Plan. I knew it was trouble as the Plan Sponsor didn't want to take a hit in his benefit but didn't want to contribute any more money. I looked at the 5500 the accountant sent over and the "B" was signed by the (I don't know what to call him) in the first paragraph. I knew I would not be comfortable unless I went back to day one or file under a corrections program and was unwilling to present this story to the prospective client (whom I didn't want anyway) besides putting myself in the position of being sued. That is you need to pay me to redo everything you've already paid for. It would have been acceptable if the Plan were under audit and the IRS was requiring redo's. So, I declined to bid.

So, the party has lived a clean life for the past 25 years but had committed criminal acts previously for which the statue remained open. Are the party's sins forgiven?

Under all of this, it is assumed your friend is a MAAA. If not the case, must your friend comply with the ABCD guidelines. What about JBEA? Not sure what they say.

Suggestion is tread cautiously and under guidance of legal counsel.

[Peter Gulia]

Rball4, do your rules of professional conduct include as an exception from a duty to report another's bad conduct that you need not (or must not) report if you learned about the other actuary's conduct in the course of your actuary-client relationship with your client (and your client has not consented to the reporting)?

[My 2 cents]

1. Granted, if the plan was subject to PPA and the enrolled actuary was failing to apply the PPA rules correctly to the extent described, that would be pretty awful. Aren't there any automatic error checks that would result in such a Schedule SB being rejected?

2. Aren't ABCD inquiries supposed to be confidential unless the upshot is a public reprimand or suspension/expulsion of the actuary?

Wouldn't that mean that the ABCD is NOT supposed to pass along information that an enrolled actuary is not properly following the applicable laws and regulations to the IRS or the Joint Board?

Remember that the ABCD is under the jurisdiction of the actuarial organizations, not the government. If anything, if the IRS or the Joint Board were to determine that an enrolled actuary was filing Schedule SBs that were thoroughly defective, the IRS or the Joint Board might report the enrolled actuary to the ABCD.

3. Has any consideration been given to the possibility that the plan in question was operating under a delayed PPA effective date?

4. Technical point: It is the plan administrator who would have been failing to meet the requirements for annual funding notices and benefit restrictions, not the enrolled actuary. While input from the enrolled actuary is necessary to properly administer those requirements and the plan's enrolled actuary should be taking an active hand in prodding the plan administrator with respect to those requirements to the extent necessary, supplying annual funding notices and applying benefit restrictions are administrative actions.

5. Has your friend tried to contact the other enrolled actuary about the apparent problems? I think that contacting the other actuary, if possible, about the issues involved would be appropriate before reporting them to the ABCD. The other actuary might have a suitable explanation or volunteer to take corrective action.

[ESOP Guy]

Ok I admit not a DB guy so here is my question:

Are the errors described here subject to self-correction? I mean not following PPA sounds like the best route is to file a VCP to fix. If so, shouldn't you be going to the IRS to "confess" so what difference does it make?

[Rball4]

Single employer plan without PPA exemptions (i.e. airlines) and not multiemployer. Also, looked up on DOL the 40 other plans the actuary works on, looked up half dozen of the bigger plans, and they all have the same issues. Most of the other plans are 1 or 2 person plans, so they usually fly under the radar. As for automatic 5500 checks, prior actuary just checked the 'yield curve' box and put whatever effective rate they wanted. I believe the IRS would only pick up on this if the plan were to be audited. Also, I believe the confidential aspect of ABCD has to do with who reported the offense. My friend is more concerned of causing issues for the client rather than the prior actuary. Usually he would prefer not to ever report another actuary, but these issues are egregious.

[Effen]

If you "know" the past work was bad, you don't really have any choice, you are required to report them. I have spoken to the ABCD several times and always came away feeling better. Even if you don't report the person, you should give them a call and talk it out. As a profession, guys like him make us all look bad and he should be reported.

PRECEPT 13. An Actuary with knowledge of an apparent, unresolved, material violation of the Code by another Actuary should consider discussing the situation with the other Actuary and attempt to resolve the apparent violation. If such discussion is not attempted or is not successful, the Actuary shall disclose such violation to the appropriate counseling and discipline body of the profession, except where the disclosure would be contrary to Law or would divulge Confidential Information.

• ANNOTATION 13–1. A violation of the Code is deemed to be material if it is important or affects the outcome of a situation, as opposed to a violation that is trivial, does not affect an outcome, or is one merely of form

[david rigby]

Yes, follow Effen's comment.

However, there is an exception: while all members of all north american actuarial organizations are required to follow the Code of Professional Conduct, if this person is an EA without any membership in any of the organizations, then the Code does not apply to that person. Look to the JBEA regs in that case.

[Rball4]

Checked SOA directory. Looks like he's an EA (1976), MAAA, and MSPA.

[Andy the Actuary]

EA (1976) suggests grandfathered EA as a possibility. A number of life insurance actuaries in our office who had never seen a pension plan became EAs at the onset. IRS administered pension proficiency exams became required circa 1978.

[My 2 cents]

1. The ABCD does not report violations of the funding rules to the IRS. And the confidentiality rules they follow extend, not just to the person reporting the apparent violation, to protecting the reported actuary from exposure (until or unless there is a finding calling for public reprimand, suspension or expulsion). Considering the length of time the person has been practicing (EA for 38 years, so in practice surely at least 40), if push came to shove, it is not unlikely that the actuary would find it better to resign his or her enrollment and retire from practice rather than force direct action by the ABCD (especially if adapting to PPA rules was too difficult for him or her to have pulled off).

2. Under Precept 13, the first thing to do would be to try to discuss the issues with the other actuary, although it is unlikely that a satisfactory result would be reached if the other actuary has similarly misperformed actuarial services for so many other clients.

3. MAAA (at least) would give the ABCD jurisdiction.

4. Self-correction would not be available or appropriate for incorrect funding determinations. Failure to meet the minimum funding requirements would not jeopardize plan qualification. Self-correction is for administrative issues. Anyway, didn't the original post say that the plan has been cleaned up and brought to where it should have been?

5. If the IRS caught on to the actuary, judging from Rball4's post, it would be easy enough for them to round up a list of plans affected by his or her practices.