Fair Value vs Contract Value

[austin3515]

Looking for the DOL reg that indicates that Value for Guaranteed Interest Accounts = Contract Value where fully benefits responsive.

In this document, http://www.dol.gov/ebsa/publications/2009ACreport3.html

which is an ERISA Advisory Council report regarding valuation of assets, it says:

"For example, for Form 5500 purposes, current value reporting is required. Current value is deemed to be contract value for fully benefit responsive funds."

Where is this rule? I cannot find it anywhere... I know the ERISA section is 3(26), which is found in 29 U.S. Code § 1002, paragraph 26, but I cannot find any related regulations.

"(26) The term “current value” means fair market value where available and otherwise the fair value as determined in good faith by a trustee or a named fiduciary (as defined in section 1102 (a)(2) of this title) pursuant to the terms of the plan and in accordance with regulations of the Secretary, assuming an orderly liquidation at the time of such determination."

And is there a web-site where I can type in the us code (e.g. title 29, Code 1002) and find any related regulations?

[Peter Gulia]

For just the reason that your last question suggests, a CCH set of "Pension and Employee Benefits" statutes and regulations is organized so that each Internal Revenue Code or ERISA section is followed by regulations that the agency has numbered as interpreting that section. For example, after ERISA section 3, there is reprinted rules or regulations that begin with 29 C.F.R. 2510.3-.

Just because Congress suggested or even directed that an agency make a rule does not mean that there is such a rule. Sometimes, there is a wait. (For example, the first rule to interpret 1974's ERISA section 404© was published more than 18 years after the statute was enacted.) ERISA still hasn't turned 40. As far as I know, there is no regulation (at least not one adopted in compliance with the Administrative Procedure Act) that fulfills ERISA subsection 3(26)'s use of "in accordance with regulations of the Secretary".

Is your purpose really about interpreting statutory language of ERISA's Title I. Or might it be about an accounting standard?

The idea of reporting some "benefit-responsive" investments at "contract value" rather than "fair value" relates to some accounting concepts. Compare Financial Accounting Standards Board, Accounting Standards Compilation 962-325-35-5 with 962-10-05-5.

At least for some purposes of reporting an asset on Form 5500 Schedule H, "current value" involves a hypothetical value because - for an asset that was not sold, redeemed, or otherwise disposed of - one considers its "fair value" as if there had been "an orderly liquidation at the time of [the] determination."

To me, the differences between the values of a contract with or without assuming a use of, or the non-application of, a benefit-responsive provision are about differences between a participant's redemption of her individual interest, and a plan's termination of the contract. In putting a hypothetical value on an individual's account as of a date in the past for the limited purpose of a section 105 pension benefit statement, it might make some sense to refer to the value that she might have obtained had she done some legally significant act on that past date. But in putting a number on the plan's rights under a contract, one wonders whether it might make sense to consider what would have happened had the plan fiduciary acted on the relevant date.

[My 2 cents]

It is my understanding that, for purposes of reporting defined benefit plan assets held in an insurance company general account on Form 5500 Schedules H and SB, contract value is generally acceptable, whether annuities are purchased (assets and liabilities both normally reported exclusive of the purchased annuities), benefits are guaranteed but not yet purchased (normally using the assets as is and valuing the liabilities), or not guaranteed (always using the assets as is and valuing the liabilities).

[austin3515]

I actually think I found the authority:

Schedule A Line 7a-f instructions indicate: "Show deposit fund amounts rather than experience credit records where both are maintained."

I looked up the term "deposit fund” and it clearly relates to book/contract value. Further “experience credits” relate to fair value because it relates to the excess of allocated assets over contract value.

Line 4 to Schedule A instructions references "current value" defined in Sched H as fair value.

Line 1c 14 instructions say:

“Use the same method for determining the value of the insurance contracts reported here as you used for line 4 of Schedule A, or, if line 4 is not required, line 7 of Schedule A.”

Line 4 on Schedule A is not required for Benefits Responsive contracts and Line 7 (as shown above) is contract value. Therefore, 1c14 should be contract value for fully benefits responsive contracts – otherwise, it would be fair value.

Also, see the "Fair Value" section of this article which I think supports my conclusions.

http://www.form5500help.com/Coordinating.html