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Can't project 415 limits for Funding?


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Just a curiosity question from a budding actuary

In ASOP 27 under "3.9.2 COST-OF-LIVING ADJUSTMENTS" it states that an actuary, for qualified pension plan funding valuations, "may be precluded by applicable laws or regulations from anticipating future plan amendments or future cost-of-living adjustments in IRC limits."

This is consistent with what I have always seen done for valuations I work on, which include two plans that provide automatic COLA increases to benefits and have plenty of participants with benefits limited by section 415. When calculating the Funding Target we project the COLA increases in the expected benefit streams for current retirees, actives, and TVs, but constrained to the current plan year limits. 

I am just curious what "laws or regulations" the ASOP is referring to that prevents us from projecting the limits for funding purposses? 

In the Gray Book's response to question 1995-11, which asked if future changes in Section 415 limits and compensation limits due to indexing should be treated as plan amendments. The IRS response was "The current position is that all changes in actuarial liabilities due to the section 401(a)(17) and 415 limits are to be treated as plan amendments, even the increases that automatically occur under a plan’s terms."

Is this somehow maybe tied to the answer? I primarily work on single employer plans, which are required to use an accrued benefit cost method. So I thought maybe this tied to the definition of an accrued benefit. But I think ASOP 27 covers multi plans too right? And they are not restricted to a specific cost method? So is there perhaps a definition or discussion somewhere around the provisions for calculating liabilities for funding purposes under the applicable parts of the code (430/431?)?

I appreciate any insight anyone can offer. I have already spent a long, but fruitful amount of time going down regulation rabbit holes this last week. While I very much enjoy my time descending into them I could use a little help with this one. Thanks!

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Found it. From 415(a)-1(d)(v)(B):

Cost-of-living adjustments not included in accrued benefit until effective. Notwithstanding that a plan incorporates the increases to the applicable limits under section 415(d) by reference, the accrued benefit of a participant for purposes of section 411 and any amount payable to a participant for purposes of § 1.415(b)–1(a)(1) are not permitted to reflect increases pursuant to the annual increase under section 415(d) of the dollar limitation described in section 415(b)(1)(A) or the compensation limit described in section 415(b)(1)(B) for any period before the annual increase becomes effective. See § 1.415(d)–1(a)(3) for rules relating to when the annual adjustments to the dollar and compensation limitations are effective. A plan amendment does not violate the requirements of section 411(d)(6) merely because it eliminates the incorporation by reference of the increases under section 415(d) with respect to increases that have not yet occurred.

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See IRC 404(o)(3)

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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16 hours ago, NonObserver said:

Thanks. It makes sense to me that that projecting the limit would not be allowed when determining the maximum deductible contribution. I am more interested in the rules pertaining to the MRC under 430.

The cushion amount an often get you a "deductible" contribution beyond what you could currently pay out under 415 if that's what you're asking.

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23 hours ago, Lou S. said:

The cushion amount an often get you a "deductible" contribution beyond what you could currently pay out under 415 if that's what you're asking.

For the cushion amount it includes the increase in PVAB if you switched to a projected unit credit method instead of accrued. I am not aware that it allows you to ignore the 415 limits, but that is interesting and I will look into that.

Just as a brain teaser I was trying to locate the part in the code that explicitly forbids projecting the 415(b) limits when calculating a Funding Target for determining your MRC under 430. I spent more time going through 415 and 411 regulations and what I believe it comes down to more or less is that the IRS considers any increases due to increases in the 415 limit as a plan amendment (even if you have automatic increases built in to the plan's provisions via reference to the 415(d) COLA increases). Since you are required to use an accrued benefit method as defined under 411 you can't include projected increases in the 415(b) limit that are not yet effective.

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