Advance funding of early retirement window

[AndyH]

We have a client who put an early retirement window in who wants it to be recognized in a beginning of year valuation. We'd be interested in any comments as to whether this is feasible, practical, or impossible, and what might have to be done to accomodate this (i.e. change the valuation date?)

I don't know all the details, but I think it's a calendar year plan with maybe 200 actives. A window was put in mid-year 2000. The 2000 val was done before the window was put in. The client wants the val revised to reflect the cost of the window. We're looking to (1) talk him out of it, or (2) tell him it is not practical or is problematic, or (3) tell him, if we do that, here's the approach we suggest (which we haven't figured out yet).

Obviously, as of 1/1/2000, we don't know the actual experience of who took the window and how much that increased liabilities, so is it proper to change the val date?

Any comments or experiences would be appreciated.

[david rigby]

We'll, right now I can address only the last question.

"...is it proper to change the val date?"

Unless you are changing the val date TO the first day of the plan year, you need "permission" from the IRS. This is often not worth the bother.

See Rev. Proc. 95-10 Section 3.13

[Guest]

I think that you would be permitted to recognize any amendment that took effect during the valuation year. I don't have a site, but I can look. I don't think you are required to recognize, but I believe you are permitted.

I think for FASB you must recognize the event since it would increase your liability.

[AndyH]

Thank you both for the comments.

We do know that you can recognize a post-valuation change for ERISA, and are required to (provided it is significant) for FAS.

The question is, if you decide to recognize the amendment for ERISA, how are you supposed to adjust the liabilities, based upon some theoretical assumption (with no real basis), or should you use actual experience, which you don't in theory know as of the valuation date.

We're looking for the technically correct or proper answer, trying to do it "by the book".

[Guest]

Gee, it seems to me if your window is already closed and you know 50% took it, that sounds like a pretty valid assumption to me.

If the window is still open, say a three year window, I don't know if you have any choice but to make some assumptions. What should they be based on? I guess I would start by asking the employer what he expects, then maybe look at previous windows if there were any, then similar windows with similar corps., and current experience (are those currently eligible taking it?). Also looking at things like cost of health care, can the participants really afford to take the window.

Funding for windows can be very tricky because you really don't know the cost until it's closes, but that shouldn't be a big problem. If you underestimated in your assumption you get a loss in your funding, if you overestimated you get a gain. Either way, once the window closes your liabilities are at the same spot. I think making sure that the employer is "buying in" to your assumption is very important.

[richard]

I think the site for recognition of amendments in funding is Rev Proc 77-2. I think.

For an already-closed window, one couldn't fault you for making a beginning-of-year assumption of early retirements equal to the actual experience.

Technically, I guess, you could place yourself at the beginning of the year and make a different assumption; the difference between this assumptions and reality would be an experience gain or loss. This could be done, for example, to increase the contribution requirement this year, with a lower requirement in future years as the gain is amortized (arguably if the actual takers were truly fewer than expected). I'd probably be more comfortable with assuming the actual experience if it is known, however.

(For a multi-year window, you will have gains or losses because you don't know the results two or three years from now.)

[david rigby]

No disagreement with other posts, but I think there might be other issues.

The correct reference is Rev. Rul 77-2. Section 2.02 discusses this issue, but note that the charges and credits are supposed to reflect the portion of the year that the amendment is effective. That might mean, especially in an individual funding method, that the normal cost is determined with and without the plan change, and then prorated.

Also, section 3 states that if the plan amendment has not been adopted by the valuation date, then the actuary may defer recognition until the next valuation date.

[AndyH]

Yes, I agree with each of these comments. This reinforces the problematic nature of this. I have to believe that others have tackled this before.