Max/ Min contributions for terminating DB plan.

[actuarysmith]

We have a client that has a 12/31 EOY valuation date. We performed the 12/31/2000 valuation according to normal schedule. This was to determine the contribution for the 2000 PYE.

On 3/31/2001, the client froze accruals and terminated the plan. (Single participant - not subject to PBGC).

How do calculate 404/412 costs? would we use a 12/31/2001 valuation date and prorate charges and credits? Or should we use a 3/31/2001 valuation date (which is now technically the last day of the plan year).

Do we calculate interest on the charges and credits to 3/31 or 12/31?

[david rigby]

OK, I'll say it: what do you want the answer to be?

If the plan was fully funded at 3/31/2001, perhaps you don't want a 412 or 404 contribution as of 12/31/2000. If so, can you re-do the 2000 valuation to make it fully funded? Just a thought.

[Guest Hans Moleman]

Being it is an EOY valuation, I would perform the valuation at the end of the plan year. That date is the date the assets are paid out, not 3/31/01. At that point you can compare the assets ($0) versus the liabilities (if any) and determine if a contribution is required. As always, prorate the normal cost in the year of termination.

I don't know of a hard and fast rule, but this is the way I would do it.

[Guest]

If the plan is fully funded on a termination basis you can change the valuation date to the date of plan termination and the funding method to unit credit for a -0- contribution per Rev. Rul.2000-40,sec. 4.02. Alternatively,refer to Rev. Rul. 79-237 to see how to calculate credits and charges to the funding standard account for the year of plan termination.

[David MacLennan]

I think a careful reading of Rev Rul 79-237 indicates the charges and credits in the FSA are carried to the end of the plan year of termination (end of plan year meaning Dec 31, not the date the assets went to zero). The Rev Rul wording does not make a clear distinction between the plan termination date and the short plan year end which exists if assets are distributed before the end of the normal plan year, but I believe the Rev Rul must be read with termination date and "normal plan year end" (e.g., Dec 31) in mind, because otherwise other statements in the Rev Rul don't make sense.

Hans' msg reminded me of a logical problem I thought of long ago that is applicable to terminees in EOY valuations. As we all know, advance contributions are removed with interest from the valuation assets in EOY valuations. It seems that terminees should also be included, even if they were paid out their benefit, with the assets increased by the distribution amount. Consider the following hypothetical extreme examples:

1) Mr Big has a DB plan for his small business. His employees participate in the plan too. He reaches age 65 Dec 30 at which point he retires and is immediately paid his lump sum. His actuary uses "n" as opposed to "n-1" normal cost amortization with IA method. A large benefit accrual occured for Mr Big in this year. The EOY val is done w/o above mentioned adjustment for terminees. Thus, no normal cost is generated for him this year. His normal cost could be very large, so the plan is "shorted" and potentially left underfunded for the remaining rank in file. This does not seem to be a reasonable funding method to me (lets ignore the 401(a)(4)-5(B) rules since this is a funding method topic not non-discrimination).

2) Mr. Big decides to hire his wife Jan 1. DB plan eligibility is immediate, so she enters on Jan 1. His wife terminates Dec 30, and as above no normal cost is generated. She has received a relatively large benefit due to her age and comp, but does not even appear on actuarial radar.

These are extreme examples, but the general idea applies to all terminees. Would love to hear comments.

[Guest Hans Moleman]

David, I haven't re-read Rev Rul 79-237, but your comments make sense. As for including a terminated paid-out participant in an EOY valuation, I am not sure I agree.

There are many examples of how the funding method does not completely account for every liability. For example, in a small plan using the aggregate funding method, one person could significantly skew the funding. In a final average pay projected unit credit valuation a participant could receive a substantial raise from the last year, then quit and be paid out. The funding would have considered his final average pay to be much greater that his accrued pay.

A "cure" for your example is that in an IA valuation, the reduction in assets due to any terminated participant distribution is accounted for by increased normal costs for the remaining participants.

Lastly, in your example (1) the owner, being an HCE, could not be paid out and leave the plan underfunded.

[David MacLennan]

I agree with your remarks. My point though is that the fundamental idea with "normal" cost is that it should recognize the costs attributable to the current year, not push them into future years. Also, it seems inconsistent to subtract advance contributions from the assets, and not do corresponding treatment for distributions. For these reasons I feel EOY vals, the way they are normally done, have some logical problems. It's mostly an academic issue. But to read SOA periodicals, you would think our work is all scientific and mathematically elegant!