OUTLINE OF CONFERENCE SESSION Computation of lump sums as by sarahjanebelonga

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									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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