OUTLINE OF CONFERENCE SESSION (1) Computation of lump-sums as limited by Section 415. Consider three plans all of which provide for life annuity Normal Form and with the following definitions of Actuarial Equivalence (Consider both Applicable Interest Rate = 5% and 8%) (a) Lump sums to be determined using 1983 GAMU, 6% or applicable mortality and interest rates, whichever produces the larger benefit. (b) Actuarial Equivalence for all forms other than determining lump-sums is 1983 GAMU, 6%. Actuarial Equivalence for purpose of determining lump sums is Applicable Interest Rate and Applicable Mortality. (c) Actuarial Equivalence for all purposes is Applicable Interest Rate and Applicable Mortality. Determine 415 limited lump sums for each of the following two individuals: A – Retires at Age 65 B – Terminates employment at Age 45 Annuity Purchase Rates (Monthly) 1983 GAMU 94GARB 94GARB AGE 6% 5% 8% 45 174.8798 199.8527 143.1067 62 137.0736 152.1573 118.6154 65 127.7561 141.5290 112.2486 Annuity Purchase Rates (Annual) 45 180.3798 205.3527 148.6067 62 142.5736 157.6573 124.1154 65 133.2561 147.0290 117.7486 415 Limit at Age 65 (Applicable Interest Rate =5%) (a) (i) $170,000 x 127.7561/12 = $1,809,878.08 Or can you argue that 415 is based on annual benefit so (ii) $170,000 x 133.2561/12 = $1,887,794.75 (Note: Can argument for (ii) be made based strictly on the wording of IRC Section 415 (b) which references a “benefit payable annually” or must some specific document wording be included? Or can you argue that by the definition of actuarial equivalence, that you get the greater amount (iii) $170,000 x 141.5290/12 = $2,004,994.17 Or continuing the argument that the wording of the IRC permits the use of annual annuity purchase rates (iv) $170,000 x 147.0290/12 = $2,082,910.83 While there is appeal in the logic behind (iii) and (iv), I think that the IRS prefers (i) or (ii). To be as safe as possible, probably use (i) unless the document wording clearly specified (ii). However, there is certainly an arguable case in favor of (ii) regardless of the document wording. In the following, illustrations will only be shown using monthly annuity purchase rates. However, the argument for using annual rates is the same as shown above. (b) This document wording would seem to provide a stronger case for $170,000 x 141.5290/12 = $2,004,994.17 (c) Can there be any interpretation other than $170,000 x 141.5296/12 = $2,004,994.17? 415 Limit at Age 65 (Applicable Interest Rate = 5%) (a) The definition calls for the greater of the two, so the first interpretation might be $170,000 x 127,7561/12 = $1,809,878.08. However, IRC Section 415(b)(2)(E)(ii) says to use the Applicable Interest Rate if that is higher. The Annuity Purchase Rate for 1983GAMU, 8% = 110,3523. It appears that the two possible computations are: (i) $170,000 x 110,3523 = $1,563,324.25 (i.e. 1983GAMU, 8%) (ii) $170,000 x 112.2486/12 = $1,590,188.50 (i.e. Applicable Mortality 8%) The argument that the “greater of” in the definition of Actuarial Equivalence is only intended to assure that 417 is satisfied suggests that the appropriate answer is (i), but the 415 regulation indicates that (ii) is the correct answer. (b) In this case, it would appear that a strong argument can be made that the correct result is to use Applicable Mortality 8%, producing a result of $170,000 x 112.2486/12 = $1,590,188.50. (c) Can there be any answer other than Applicable Mortality, 8% producing a result of $170,000 x 112.2486/12 = $1,590,188.50. 415 Limit at Age 45 (Applicable Interest Rate = 5%) The 415 Limit payable at Age 62 is $170,000/yr. (a) Maximum benefit payable at Age 45 is lesser of (i) and (ii) when (i) is based on 1983 GAMU, 6% and is $170,000 x v**17 x 137.0736/174.8798 = $49,483.84/yr. (ii) is based on Applicable Mortality, Applicable Interest and is $170,000 x v**17 x 152.1573/199.8527 = $56,469.46 Maximum lump sum is the lesser of (iii) and (iv), where (iii) is $49,483.84/year valued at 1983Gamu, 6% or $49,483.84 x 174.8798/12 = $721,143.67 (iv) is $49,483.84/year valued at Applicable Mortality and Applicable Interest Rates, or $49,483.84 x 199.8527/12 = $824,123.25 415 Maximum Lump Sum is $721,143.67 (b) Maximum annual benefit is computed as above and is $49,483.84/yr. Maximum lump sum is computed using Applicable Mortality and Applicable Interest Rate and is $49,483.84 x 199.8527/12 = 824,123.25. (c) Maximum annual benefit is computed as above and is $56,469.46/yr. Maximum lump sum is computed using Applicable Mortality and Applicable Interest Rate and is $56,469.46 x 199.8527/12 = $940,464.50. 415 Limit at Age 45 (Applicable Interest Rate = 8%) (a) Maximum annual benefit is lesser of (i) and (ii) where (i) is based on 1983GAMU, 6% and is $170,000 x v**17 x 137.0756/174.8798 = $49,483.84 (ii) is based on Applicable Mortality Applicable Interest and is $170,000 x v**17 x 118.6154/143.1067 = $38,082.56/yr. Maximum lump sum is the lesser of (iii) and (iv), where (iii) is $38,082.56/yr. Valued at 1983 GAMU, 6% or $38,082.56 x 174.8798/12 = $554,989.21 (iv) is $38,082.56/yr. Valued at Applicable Mortality and Applicable Interest Rate, or $38,082.56 x 143.1067/12 = $454,155.79 415 Maximum Lump Sum is $454,155.79 (b) Maximum annual benefit is computed as above and is $38,082.56/yr. Maximum Lump Sum is computed using Applicable Interest and Applicable Mortality and is $38,082.56 x 143.1067/12 = $454,155.79 (c) Maximum annual benefit is computed as above and is $38,082.56/yr. Maximum Lump Sum is computed using Applicable Interest and Applicable Mortality and is $38,082.56 x 143.1067/12 = $454, 155.79 (2) Determine most valuable accrual rate for same plans. JT + 50% Rates, P65C65 1983 GAMU 6% 138.8796 Suppose plan benefit payable on a lifetime basis is $1,000/month. The benefit payable on a Jt & 50% basis would be $1,000 x (127.7561/138.8796), of $919.91/month. Reg 1.401(a)(4) defines standard interest rate as anything between 7½ and 8½ and lists standard mortality Tables, one of which is 1983 GAM. If we use 1983 GAM (Males) for primary annuitant and 1983 GAM (Females) for contingent annuitant and use an interest rate of 8% the Annuity Purchase Rate is 116.066. The value of this is $919.91 x 116.066 = $106,770.27. The value of a lump-sum assuming an Applicable Interest Rate of 5%, is $1,000 x 141.5290 = $141,529.00 Because of the above some actuaries have suggested that the lump-sum option be assumed when testing “most valuable accruals” on the grounds that this is more in line with what they perceive to be the intent of general testing. However, the regulation says to use the QJSA and doing so appears to be consistent with the Relative Value regulations. Jim, could you discuss this for us? (3) If insurance proceeds exceed the plan’s death benefit by more than $100,000, insurance becomes a “listed transaction”. Consider situation in which plan provides a death benefit equal 100 times the projected monthly benefits and the Plan’s benefit formula is 10% of High-Average Compensation for each year of service not in excess of 10. Suppose that an individual who is at least 10 years younger than Normal Retirement earns $170,000 in her first year of employment and that a life insurance policy for $1,416,666.67 is issued on her life. The next year, her compensation decreases to $125,000, resulting in a projected benefit of $11,666.67 per month. Under the terms of the plan, her death benefit automatically adjusts to $1,166,666.67, resulting in an insured death benefit that is $250,000 in excess of the plan’s death benefit. (a) When during the year does this become “listed transaction”? (b) When does it have to be reported? (c) What are the consequences of being a “Listed transaction”? (d) Is there any correction other than surrender of some or all of the life insurance policy? (e) If compensation reduction was such that the death benefit reduced by, say, $80,000, what are the consequences? (4) Frozen Initial Liability Funding, End of Year Valuations, Advance Contributions Unfunded Liability, 01/01/05 $ 713,538.66 Unamortized Charge Base, 01/01/05 $ 818,709.56 Credit Balance, 01/01/05 $ 105,170.90 Annual Amortization $ 61,069.63 Reconciliation Account, 01/01/05 $ 0.00 Reconciliation Account, 12/31/05 $ 0.00 Valuation Interest Rate 6% Advance Contribution, 06/08/05 $ 5,993.96 Interest on Advance Contribution, 12/31/05 $ 200.39 Assets, 12/31/05 $ 331,142.56 Unamortized Charge Base, 12/31/05 $ 818,709.56 x 1.06 = $ 867,832.13 Unfunded Liability 12/31/05 $ 713,538.66 x 1.06 – 200.39 = $756,150.59 Credit Balance, 12/31/05 $ 105,170.90 x 1.06 + 200.39 = $111,681.54 404 Assets, 12/31/05 $ 331,142.56 - $5,993.96 = $325,148.60 412 Assets, 12/31/05 $ 331,142.56 - $111,481.15 - $5,993.96 – 200.39 = $213,467.06 PVB, 12/31/05 $ 1,380,165.00 Balancing Equation $ 867,832.13 - $111,681.54 = 756,150.59 Normal Cost Numerator: 412 $1,380,165.00 - $867,832.13 - $213,467.06 = $298,865.81 404 $1,380,165.00 - $756,150.59 - $325,148.60 = $298,865.81 (5) Suppose that a plan sponsor maintains both of a defined contribution plan and a defined benefit plans. Suppose further that the defined benefit, which is covered by the PBGC, terminates with assets that are not sufficient to pay all benefits and that the plan sponsor wishes to contribute the amount required to pay all benefits. In this situation, is the deduction for the amount contributed to both plans limited to 25% of payroll? If so, may the excess amount be treated as a carry-forward and deducted in subsequent years.
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