AFTAP - Annuity Purchase

[Craig Jacobs]

Under 436, both the AVA and the FT is to be adjusted by adding in the value of annuities purchased in the prior 2 years for NHCEs. If a plan purchased annuities for its entire retiree population, how would one determine NHCE vs. HCE, especially given that many retired more than 10 years ago? Since it was done as a single transaction with one purchase price, how would one be able to allocate the purchase price between NHCE vs. HCE?

Thanks in advance.

[Andy the Actuary]

You can probably estimate with a small degree of error by the annuity amount whether the employee was an HCE or NHCE.

You should have a liability for the annuities purchased on the PBGC basis used to determine the unfunded vested benefits. You could use the NHCE liabilities as a proxy. If the result is not material, then you could go with the result and actually play with the numbers by using a scaling factor to see if you used 90% to110% of the liabilties would it be material (does it matter if the answer is 91% or 95%?)? Then, if not material you could certify and qualify in your certification.

If results are material or you feel discomfort with this suggestion, then the annuity provider should be able to provide a breakdown of costs.

[Craig Jacobs]

Thanks Andy. I assumed estimation techniques would be ok and, in this particular situation, the impact on the AFTAP is not material (AFTAP is just over 100%, so doing the adjustment merely brings the AFTAP down slightly). However, had our AFTAP been under 80% and the adjustment gets the plan over 80%, I'd want to be more precise.

For HCE/NHCE determination, would that be based on when they terminated employment? Or is the HCE/NHCE determination based on the year of the purchase. i.e., if a retiree terminated years ago, regardless of his compensation at termination, he would not be an HCE in the year of the annuity purchase.

I got to think that there have been a number of retiree buyouts over the past couple years. Wonder how people are handling this.

Thanks again!

[My 2 cents]

Would the AFTAP adjustment reflect all annuities purchased except for HCEs and former HCEs? If the FTAP is below 80% as of the beginning of the next plan year but the purchase might push it over 80%, it might be worth the effort to (a) identify from plan records which individuals included in the purchase would have been HCEs or former HCEs and (b) obtain a breakdown of the total purchase price into the part attributable to them and the part attributable to everyone else. Anyone who was an HCE when they separated from service would always be a former HCE irrespective of how much time has passed.

As the FTAP after the purchase is still over 100% (well-funded plan!), perhaps something reasonable is good enough. After all, if the FTAP is over 100%, any amount to be added would, while bringing the AFTAP closer to 100%, never bring it down below 100%, so the plan would be exempt from quarterlies in the following year anyway.