ASC 715 Report & Cash Balance Plans

[shERPA]

Met with a prospect, currently have a CB plan.  They also need audited financial statements so their actuarial firm provided an ASC 715 report.   Question from the employer - the benefit obligation figure on the ASC 715 exceeds the CB hypothetical account balances.  

I suppose it is a matter of assumptions, and what is reasonable.  Is this typical of what CB plan sponsors are dealing with?  This is a small plan,  for IRS funding the assumption is lump sum distribution of the HAB.  I see ASC 715 assumption is the benefit in the form of a life annuity, which I suspect is the reason for the difference.

Thanks.

[Calavera]

Generally, none of the liability measurements will match the total of CB hypothetical account balances. You project with your credited rate and discount with the discount rate. If credited rate is higher than the discount rate, you will get higher liability.

[shERPA]

Thanks. 

In the plan I'm looking at, the crediting rate is 3.5%, the discount rates for the ASC report are 4% pre and 5% post retirement.  Plan equivalance is 5/5 and applicable table (post only).  ASC benefit obligation is 10.4% greater than the total HABs.  

So in this case the crediting rate < discount rate.  That's why I'm wondering if the assumed form of benefit is the cause. 

[david rigby]

Has anyone posed these questions to the signing actuary?

 

[shERPA]

3 hours ago, david rigby said:

Has anyone posed these questions to the signing actuary?

Well, sort of.  The client has gone back to the current firm twice, and twice it's been revised, but they are not very good at explaining things.  

[Calavera]

22 hours ago, shERPA said:

In the plan I'm looking at, the crediting rate is 3.5%, the discount rates for the ASC report are 4% pre and 5% post retirement.  Plan equivalance is 5/5 and applicable table (post only).  ASC benefit obligation is 10.4% greater than the total HABs

It just doesn't smell right. Unless there are some minimum benefits (i.e. 0.5% annuity) or top-heavy benefits that override the value of some account balances. Client may ask the actuary to provide liability results per person to see if all participants affected or just some of them, and then ask for detailed calculation of a sample person.

[shERPA]

2 hours ago, Calavera said:

It just doesn't smell right. Unless there are some minimum benefits (i.e. 0.5% annuity) or top-heavy benefits that override the value of some account balances. Client may ask the actuary to provide liability results per person to see if all participants affected or just some of them, and then ask for detailed calculation of a sample person.

Thanks for confirming my puzzlement.   

By the third revision, the gap between the benefit obligation and the assets/contribution was low enough that the auditor passed on it as not material, so the client has moved on.  We will do 2019 so we'll see what comes up.   Per the plan document there should not be any TH minimums in the CB as the DC plan covers 416.  Of course they might have included minimum benefits in the val in error.   The pay credits look sufficient to exceed 0.5% benefits, but I've not taken a calculator to them yet.