1 slide per page

Actuarial 101 & 102 – Understanding DB
Mary Ann Rocco, EA, MSPA Consulting Actuary
Huntington Beach, CA (714)-393-8845, mar@roccoEA.com
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Mary Ann Rocco, EA, MSPA Consulting
Actuary
Mary Ann started her actuarial consulting firm in 1987 in
Huntington Beach, CA. Her firm provides actuarial services to
pension administration firms with a specific focus on
designing both Traditional and Cash Balance Plans intended
to maximize benefits for business owners. Mary Ann was
elected to the College of Pension Actuaries ("COPA") board
of directors in 2006 and served as President of ASPPA's
College of Pension Actuaries ("ACOPA") in the 2009-2010
year. She is currently serving on the Ed Burrows Award
Nominating Committee as well as presenting at various
conferences throughout the country.
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INTRO
• Both sample plans are a „DB/DC Combo‟
• DB fails non-discrimination testing and Top
Heavy on its own.
• When aggregated with DC plan, the
aggregated “Plan” will satisfy Top Heavy
and non-discrimination.
• DB/DC gateway and Top Heavy different than standalone DC plans.
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INTRO
• Once a participant in a DB satisfies the
definition of „accrual hours‟ they have a right
to that year‟s accrued benefit/top heavy.
• Typically accrual hours = 1000, but can be
any number not greater than 1000
• unless plan is using pro-ration accrual rules
• DC contributions are no longer discretionary
If tested with a DB plan once the DB
benefits are accrued.
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INTRO
• All DB plans have a valuation date
• For plans with over 100 Participants on any
day of the preceding plan year, the valuation
date must be the first day of the Plan Year
(BOY Val).
• For plans with 100 or less, the valuation
date can be any day of the Plan Year,
usually the last day of the Plan Year (EOY
val).
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INTRO
• 2015 BOY val (1/1/15) based on
• 12/31/14 census & trust data
• Including 2014 contribution receivables
• 2016 BOY (1/1/16) val uses:
• 12/31/15 census & trust data
• Including 2015 contribution receivables
• 2015 EOY val uses:
• 12/31/15 census & trust data
• Excluding 2015 current year contributions
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INTRO
• IMHO EOY vals flow better.
• Easier to follow by both TPA and Sponsor.
• One set of data received and used for all
tasks associated with that Plan Year.
• Both the Traditional and Cash Balance
examples are 2015 plan years with 12/31/15
val date.
• Both plans covered by PBGC.
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INTRO
• Traditional DB plan vs Cash Balance Plan
• Traditional DB plan defines the accrued
benefit as a monthly annuity payable at
Normal Retirement Age/Date (NRA).
• There are DB formulas that satisfy the DB
Safe Harbor rules that mean the plan
automatically satisfies non-discrimination.
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INTRO
• A few sample SH DB plan formulas:
• 5% of Hi 3 Avg pay x YOP (Unit credit)
• AB based on YOP to date.
• $10/mo x YOP (Flat dollar)
• AB based on YOP to date
• 100% of pay reduced 1/25th for each YOP
less than 25 (Fixed) (cannot be < than 25)
• AB based on fractional accrual =
• YOP completed ÷ Total YOP at NRA
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INTRO
• The Lump Lum (LS) payable at any given
date is the Present Value of Accrued Benefit
(PVAB).
• LS in Traditional DB = the greater of:
• PVAB using the Plan defined Actuarial
Equivalence assumptions(AEQ)
• PVAB using the IRS issued 417(e)(3)
„segment rates‟.
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INTRO
• What is Actuarial Equivalence?
• Two things are considered equal in value
based on a specific set of interest rate and
mortality assumptions.
• PVAB is actuarially equal to the benefit at
retirement.
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INTRO
• Cash Balance plans are just another type of
DB plan, but the benefit at NRA defined by
the lump sum.
• The lump sum is called the Hypothetical
Account Balance (HAB).
• The HAB is credited each year with:
• Hypothetical Allocations (Ctb‟s)
• Pay Credits, Contribution Credits, Principle Credits
• Hypothetical Interest Credits
• Fixed or Variable in accordance with the regs
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INTRO
• Typical Benefit formulas are usually a
percent of pay, a flat dollar amount or a
combination of two:
• $50,000 x YOP
• 3% x current year compensation
• Lesser of 3% of compensation or $500
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INTRO
• No 417(e) applied (with exceptions)
• The accrued benefit at NRA is determined
by projecting the HAB.
• Once the accrued benefit at NRA is
determined, the plan operates the same as
a Traditional DB Plan.
• The automatic form for benefits greater than the
cashout threshold ($1,000/$5,000) are still
payable as an annuity benefit.
• Still require spousal consent on the QJSA.
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INTRO
• Why do we LOVE cash balance plans?
• Lump sums are predictable and not subject
to the 417(e) interest rates.
• Works well with multiple owners
• Look more like a DC plan, easier for TPA to
explain to client.
• Keep in mind, unlike a DC plan, the account
balances have no relation to the value of the
trust assets.
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INTRO
• Why aren‟t all plans Cash Balance?
• Single owner plan, wants the „max‟ year after year
• Currently not available on pre-approved
documents.
• Individually Drafted Documents more work &
higher fees.
• Pre-Approved documents are coming soon, make
sure sponsor adopts Form 8905 timely
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CASH BALANCE PLAN
2015 BENEFITS
Handout #1 – Cash Balance Plan, Page #1
• Valuation date = 12/31/15
• Accrual Hours = 1000
• NRA = anniversary nearest 62/5
• Benefit Formula (#1):
• Group 1 – flat pay credit = $200,000.
• Group 2 – flat pay credit = $800
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CASH BALANCE PLAN
2015 BENEFITS
• Top Heavy provided in PS plan
• Normal Form is a Single Life Annuity
• Normal form tells us how the benefit will be
valued at NRA
• Not the same as the plan‟s automatic form of
payment.
• Three year cliff vesting is required to satisfy
the Applicable Hybrid rules
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CASH BALANCE PLAN
2015 BENEFITS
• Actuarial Equivalence
•
•
•
•
Pre-retirement interest: 5.00%
Pre-retirement mortality: None
Post-retirement interest: 5.00%
Post-retirement mortality: 1994 GAR
• Interest crediting rate (Page #2) = 5%
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CASH BALANCE PLAN
2015 BENEFITS
• Page #3a - Census
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CASH BALANCE PLAN
2015 BENEFITS
• Current Year benefits:
• Class1 = Edward = $200,000
• Class 2 = Brian = $800
• Before we move forward with valuation need
to check 401(a)(26)
• a)(26) is a two prong test (DB only):
• DB Plan must benefit the lesser of
• 50 employees
• 40% of non-excludable employees
• But in no event less than 2.
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CASH BALANCE PLAN
2015 BENEFITS
• Benefitting for a)26 generally accepted as a
.50% of pay benefit or greater at NRA.
• Tested on the accrued benefit increase in
the testing year.
• Will test a)26 using current compensation
for simplicity.
• Brian‟s monthly comp = $5,500 x 50% =
$27.50 or greater for a)26
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CASH BALANCE PLAN
2015 BENEFITS
• AB increase = current pay credit projected
to NRA ÷ by the Annuity Purchase Rate.
• The APR represents the cost of a $1 per
month benefit payable at NRA.
• Brian‟s AB increase
• 33 years to NRA (62-29)
• Age 62 APR = 152.1573
• 1994 GAR / 5%
• $800 x 1.05^33 ÷ 152.1573 = $26.31
• Plan fails 401(a)(26)
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CASH BALANCE PLAN
2015 BENEFITS
• $27.50 x 152.1573 ÷ 1.05^33 = $836, round
up to $840.
• Plan will adopt a corrective amendment by
10/15/16 (just like your non-discrimination
corrective amendments)
• Minimum and Maximum contribution
calculations do not include benefit increases
from a corrective amendment.
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CASH BALANCE PLAN
2015 BENEFITS
• But…page #3b reflects increased benefit.
• 1
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CASH BALANCE PLAN
2015 BENEFITS
• Page #4a, Schedule of Benefits - funding
calculations based on the annuity benefit at
NRA.
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CASH BALANCE PLAN
2015 BENEFITS
• End of Year Accrued Benefit = Total HAB
projected to NRA ÷ APR
• Brian:
• $6,553.62 x 1.05^33 ÷ 152.1573 = $215.49
• Edward
• $1,426,237.18 x 1.05^5 ÷ 152.1573 = $11,963.15
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CASH BALANCE PLAN
2015 BENEFITS
•
•
•
•
•
Eddie‟s EOY HAB = 1,426,238
Eddie‟s PVAB = 1,423,300
Why don‟t they match?
IRC 415 DB limits
Applies to both Traditional and Cash
Balance plans.
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CASH BALANCE PLAN
2015 BENEFITS
• DB 415 Limit defines the maximum monthly
annuity benefit payable at any time.
• Also defines the maximum PVAB/Lump
Sum that can be paid.
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CASH BALANCE PLAN
2015 BENEFITS
• First we need to determine that the accrued
benefit at NRA does not exceed 415
maximum annuity benefit.
• Second we need to determine that the
current LS does not exceed the maximum
lump sum.
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CASH BALANCE PLAN
2015 BENEFITS
• Maximum 415 benefit at NRA is the lesser
of two prongs
• (1) 415 Dollar Limit (issued annually)
• reduced for 1/10th for each YOP less than 10
• (2) 415 Comp Limit
• Highest consecutive 3 Year Compensation Average
• Reduced by 1/10th for each YOS less than
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CASH BALANCE PLAN
2015 BENEFITS
• The 2015 Dollar Limit = $210,000/yr or
$17,500/mo payable from ages 62 - 65.
• Must be adjusted down for younger ages and
up for older ages.
• The Hi 3 Comp Limit is payable at any age.
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CASH BALANCE PLAN
2015 BENEFITS
• Eddie has >10 YOS, 7 YOP and a Hi 3 Avg
Comp of $21,250.
• 415 „Comp Limit‟ = $21,250
• 415 Dollar limit = $17,500 x 7/10 = $12,25062
• Eddie‟s 415 maximum accrued benefit at
age 62 = $12,250/mo regardless of HAB.
• Eddie‟s benefit at NRA from his HAB =
11,963.15 < 415 limit.
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CASH BALANCE PLAN
2015 BENEFITS
• 415 lump sum limit rules for plans with less
than 100 employees:
• Determine the maximum monthly benefit at the
calculation date (year end)
• Value as a lump sum using 5.50% interest and
the Applicable Mortality Table.
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CASH BALANCE PLAN
2015 BENEFITS
• 415 Dollar Limit at age 57
• Plan APR‟s (1994 GAR / 5%)
• APR at age 62 = 152.1573
• APR at age 57 = 168.7738
• $12,25062 x 152.1573 ÷ 1.05^5 ÷ 168.7738
=
$8,653.2157
• 415 Comp Limit = $21,250
• 415 LS will be based on lesser amount.
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CASH BALANCE PLAN
2015 BENEFITS
•
•
•
•
•
2015 415-LS based 2015 AMTable/5.50%
415 APR57 = 164.4823
$8,653.21 x 164.4823 = $1,423,300 vs
HAB = $1,426,238 (Page #4b)
The 415 comp limit is the current High 3 x
current 415 Lump Sum APR.
• Once a participant establishes a Hi 3 and
has 10 YOS the 415 LS comp limit
decreases ever year.
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CASH BALANCE PLAN
2015 BENEFITS
• Page #3b - Interest credits are part of the
accrued benefit and have to be defined in
the Plan Document.
• Partial Year interest credited terminated
participants.
• A change in the way interest is credited is a
change in formula.
• Prior benefits must be protected under old
interest rates or crediting method.
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CASH BALANCE PLAN
2015 BENEFITS
• No specific requirement on how partial-year
interest is credited.
• Interest can be daily (unworkable), monthly
or quarterly (most common) or annually (the
regs do not disallow it).
• If Plan language is ambiguous:
• A Participant shall be credited with a pro-rata
Interest Credit up to the date distributions.
• The interpretation must remain consistent.
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2015 BENEFITS
• Reports should provide Account Balances (#3b)
• And Accrued Benefits (#4a)
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CASH BALANCE PLAN
2015 FUNDING
• The Actuary should provide several
numbers after the valuation is performed.
• 430 Minimum Required Contribution /
minimum funding (MRC)
• 404 Maximum Deductible Contribution
• The „Recommended‟ Contribution
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CASH BALANCE PLAN
2015 FUNDING
• MRC and Maximum Deductible calculations
based on three segment interest rates (PPA)
• Without regard to MAP-21 and HATFA rules,
the interest rates are issued for each month.
• Would be the same for 430 and 404
• The default is to use the rates in effect on
the valuation date.
• The sponsor can elect in writing a 1, 2, 3 or 4
month lookback.
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CASH BALANCE PLAN
2015 FUNDING
• Funding Relief under MAP-21 in 2012 at
HATFA in 2013.
• Require different (higher) interest rates for
430 MRC / AFTAP.
• IRS issues one set of segment rates under
for each Calendar Year.
• A plan will use the HATFA rates for the
calendar year that contains the 1st day of the
Plan Year.
• Regular PPA rates used for 404, PBGC.
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CASH BALANCE PLAN
2015 FUNDING
• Page #2 shows PPA segment rates for:
• 404 (Max Deduction)
• 430 (MRC)
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CASH BALANCE PLAN
2015 FUNDING
• Definitions for MRC:
• Target Normal Cost (TNC) = Present Value
of the increase in accrued benefit for the
current plan year using the 430 segment
rates.
• EOY AB minus BOY AB.
• Sometimes different than EOY AB minus last year‟s
EOY AB.
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CASH BALANCE PLAN
2015 FUNDING
• Funding Target (FT) = Present Value of the
benefit accrued on the 1st day of Plan Year
(BOY Benefit) using the 430 segment rates.
• Actuarial Assets = the DB trust valued on
the valuation date, excluding rollover
accounts and any current year contributions.
• For some purposes Assets are reduced by any
Prefunding Balances.
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CASH BALANCE PLAN
2015 FUNDING
• Carryover / Prefunding Balances:When a
sponsor contributes more than the MRC for
any given plan year (excess).
• Pre-PPA we called these credit balances.
• A signed election must be made to „add‟ the
excess to a PFB.
• Balances can be applied against MRC to
reduce funding, provided certain conditions are
met.
• Can also cause an increase in MRC
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CASH BALANCE PLAN
2015 FUNDING
• Shortfall: If the FT is greater than the
Adjusted Assets the difference is called a
Shortfall and indicates the plan is
underfunded
• Shortfall charge. The above shortfall
amortized over 7 years using the Effective
Interest Rate (EIR).
• (EIR) – a single rate that would re-produce
the same FT and TNC calculated by the
three 430 segment rates.
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CASH BALANCE PLAN
2015 FUNDING
• Minimum Funding Charges
• Target Normal Cost
• Shortfall Amortizations
• Prior unpaid Minimums
• Minimum Funding Credits
• Contributions discounted to valuation date.
• Surplus of Adjusted Assets over FT, not to
exceed TNC.
• Elections to apply a COB/PFB against the
charges
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CASH BALANCE PLAN
2015 FUNDING
• Page #5 - The benefits used to calculate
Funding Target and Target Normal Cost
• The Liabilities associated with these benefits
are calculated using the three 430 funding
segment rates.
• The calculation of the liabilities are outside the
scope of this outline.
• The benefits used for FT and TNC are not.
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CASH BALANCE PLAN
2015 FUNDING
• Funding Target benefit is calculated from
the BOY HAB + current year Interest Credit,
limited by 415.
• Brian FT = ($5,441.54 + $272.08) =
$5,713.62 x 1.05^33 ÷ 152.1573 = $187.87
• Eddie FT = ($1,167,844.93 + $58,392.25) =
$1,226,237.18 x 1.05^5 ÷ 152.1573 =
$10,285.57 *
*1/1/15 415 Max = $17,500 x 6/10 = $10,500
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CASH BALANCE PLAN
2015 FUNDING
• Target Normal Cost benefit is the difference
of EOY AB – BOY AB.
• Brian: $215.49 - $187.87 = $27.62
• Eddie: $11,963.15 - $10,285.57 = $1,677.58
• Alternatively we could take the 2015 pay
credit, do the same math for benefits…
• $200,000 x 1.05^5 ÷ 152.1573 = $1,677.58
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CASH BALANCE PLAN
2015 FUNDING
• Page #5 – FT & TNC
• FT + TNC = $1,356,913
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CASH BALANCE PLAN
2015 FUNDING
• Page #6 (C14-18) Funding Shortfall
•
•
•
•
•
Assets on 12/31/15, no „pre-ctb‟s‟ to back out.
FT - Assets = $105,479 shortfall
7 year amortization factor = 6.01312
Amortization charge = $17,541
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CASH BALANCE PLAN
2015 FUNDING
• Page #7D – Minimum Required
Contribution (MRC)
• vs 2015 CB credits = $200,840
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CASH BALANCE PLAN
2015 FUNDING
• $207,775 represents the amount of ctb that
would need to be deposited on 12/31/15.
• Contributions deposited after YE are
discounted (decreased) with interest to val
date.
• Higher contribution total to meet MRC.
• Contributions deposited during the year are
increased with interest to val date.
• Lower contribution to meet minimum funding.
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CASH BALANCE PLAN
2015 FUNDING
• Interest used for discounting = EIR (Pg#6) =
6.13%
• If the plan had a shortfall in the prior year
the interest used for discount has a 5%
penalty rate added (EIR + 5%).
• Higher interest discount means higher
contribution to meet MRC.
• These calculations are complicated and luckily
n/a in our sample plan.
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CASH BALANCE PLAN
2015 FUNDING
• The MRC we tell the client depends on the
date it‟s deposited, hard to administer.
• Can keep it simple by quoting the MRC
assuming deposit made 8 ½ months after
YE (DB funding deadline).
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CASH BALANCE PLAN
2015 FUNDING
• Project MRC by number of days between
9/15/16 - 12/31/15 = 259 days.
• $207,775 x 1.0613^(259/366) = $216,709*
• If above amount deposited on 9/15/16 the
contribution would exactly satisfy MRC.
*round up to $216,725 for „wiggle room‟.
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CASH BALANCE PLAN
2015 FUNDING
• If sponsor indicates they only want to fund
the absolute minimum, ask for the expected
month of deposit and ask revised MRC.
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CASH BALANCE PLAN
2015 FUNDING
• Recommended Funding is typically the
amount to fully fund the plan benefits as of
year end.
• Total HAB (Pg #4) = $1,429,853
• Year end Assets = $1,061,200
• Recommended = $1,429,853 - $1,061,200 =
$368,653, round up to $368,700
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CASH BALANCE PLAN
2015 FUNDING
• 404 Maximum comes from the same FT and
TNC benefits, different interest rates
produce different liabilities.
• w/o regard to MAP21/HATFA
• Maximum amounts reported on valuation
not always accurate.
• ie, If a plan had an amendment increasing HCE
benefits in the current year or prior 2 years
(based on adoption date) those increases are
excluded from „the cushion‟.
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CASH BALANCE PLAN
2015 FUNDING
• Maximum Funding (pg #7E):
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CASH BALANCE PLAN
2015 FUNDING
• Rarely quote the real maximum
• Contributions in excess of PVAB are called
„excess assets‟.
• Excess assets are like funding future accruals
and do not „belong‟ to anyone.
• Excess assets has not yet been tested for nondiscrimination.
• 415 issues
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CASH BALANCE PLAN
2015 FUNDING
• With owner-only plans the only
consideration is overfunding on a 415 basis
• need to be able to distribute all the assets on
termination.
• No consequence if the accrued benefits are
overfunded.
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CASH BALANCE PLAN
2015 FUNDING
• Sponsor confirmed $368,700 funded 5/1/16
• Confirmation is not:
• advance notice of future funding dates.
• Email from TPA
• Confirmation is:
• Forwarded email from broker or sponsor
confirming date(s) and amount(s)
• Copy of check, bank statement, signed
certification, image of check or deposit slip
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CASH BALANCE PLAN
2015 FUNDING
• MRC vs Recommended =
$216,709 vs $368,700
• MRC liabilities are understated compared to
actual plan liabilities, will only get worse in
the next few years.
• If plan is funding MRC, benefits are too high
and benefit formula should be amended.
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CASH BALANCE PLAN
2015 SCHEDULE SB
• Schedule SB (page #9) reports the 430
numbers from the valuation report.
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CASH BALANCE PLAN
2015 SCHEDULE SB
• Page #10 – COB/PFB information.
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CASH BALANCE PLAN
2015 SCHEDULE SB
• Funding Percentages
• Line 14 = FTAP
• same data used for BOY vs EOY vals
• (Assets – COB/PFB) ÷ FT
• Line 15 = AFTAP
• BOY vals Line 15 = 2015 certified AFTAP
• due 9/30/15
• EOY vals Line 15 = 2016 certified AFTAP
• due 9/30/16
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CASH BALANCE PLAN
2015 SCHEDULE SB
• Discounted value of contribution.
• Days between 5/1/16 – 12/31/15 = 122
• $368,700 ÷ 1.0613^(122/366) = $361,460
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CASH BALANCE PLAN
2015 SCHEDULE SB
• Page #11 – 430 rates, Weighted Avg NRA
• If line 26 is checked „Yes‟ it means the plan
is covered by PBGC.
• :ome 26
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CASH BALANCE PLAN
2015 SCHEDULE SB
• Line 38 ($153,685) will be reported on line 11a
on the 2016 SB.
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CASH BALANCE PLAN
2016 AFTAP
• AFTAP regs written for BOY valuations.
• Ignoring COB/PFB, 2016 AFTAP for BOY
val generated from:
• FT on 1/1/16
• 12/31/15 accrued benefits
• Assets on 1/1/16
• 12/31/15 assets with 2015 ctb receivables
• 2016 AFTAP for BOY val reported on 2016
SB
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CASH BALANCE PLAN
2016 AFTAP
• 2016 AFTAP for EOY val will step back 1 day
• Instead of 2016 FT will use 12/31/15 FT +
TNC
• Same 12/31/15 Accrued Benefits
• Assets = 12/31/15 assets + 2015 ctb rec‟ble
• The 2016 AFTAP for BOY vs EOY based on
liabilities / assets at same point in time.
• 2016 AFTAP for EOY val reported on 2015
SB
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CASH BALANCE PLAN
2016 AFTAP
• Page #12 – Adjusted Funding Target
Attainment Percentage or AFTAP
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CASH BALANCE PLAN
2016 AFTAP
• What exactly is the AFTAP?
• The purpose is to represent the plan‟s
funded status.
• The AFTAP is based on 430 interest rates
and liabilities, not a true picture of the plan‟s
funded status.
• A 100% AFTAP does not mean the plan is
fully funded on a termination basis.
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CASH BALANCE PLAN
2016 AFTAP
• The AFTAP is very significant to the Plan
even though it‟s not filed with the IRS.
• The actuary must certify the AFTAP after
contributions are confirmed.
• usually prepared with the prior year SB.
• If the actuary has provided the AFTAP timely
but the Annual Admin package not ready you
need to send it to the Plan Sponsor anyway.
• Emailing the AFTAP to the Sponsor is fine!
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CASH BALANCE PLAN
2016 AFTAP
• The AFTAP is due on the last day of the 9th
month after YE, 9/30 for calendar plans.
• earlier than the 5500 deadline
• TPA‟s job is to
• Train clients to send ctb confirmation as soon
as deposited
• Provide ctb confirm to actuary ASAP.
• Make sure certified AFTAP is provided to
sponsor timely.
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CASH BALANCE PLAN
2016 AFTAP
• Why do you care if AFTAP not certified/late?
• AFTAP less than 80%:
• No amendments increasing benefits that impact
Funding Target.
• Only 50% of lump sums can be paid $5,000*.
• AFTAP less than 60%:
• Freezes future benefit accruals
• No lump sums can be paid if $5,000*
*Exception
for plans frozen by 9/1/05
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CASH BALANCE PLAN
2016 AFTAP
• The actuary should alert you when there is
an AFTAP problem and what to do about it.
• Any AFTAP below 80% will require an
employee Notice (called a 101(j) or 436
Notice).
• Your actuary can prepare the 436 Notice.
• Different notices for AFTAP under 80% vs
AFTAP under 60%.
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CASH BALANCE PLAN
2016 AFTAP
• If the AFTAP not certified, treated the same
as if the AFTAP less than 60%
• Restrictions apply, 101(j) notice is due.
• If AFTAP certified after 9/30 but before 1/1
of the next year certification is ignored.
• Restrictions apply until 1/1, 101(j) notice due.
• 101(j) notice due to Participants 30 days
after certified AFTAP below 80% or the date
the AFTAP is presumed under 60%
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CASH BALANCE PLAN
2015 PBGC AFN
• This Plan is covered by PBGC.
• PBGC covered plans have a different
Participant Notice requirement called the
Annual Funding Notice (AFN)
• The AFN can replace the Summary Annual
Report (SAR) for DB Plans covered by
PBGC, provided the proper Small Plan Audit
Exception language is included.
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CASH BALANCE PLAN
2015 PBGC AFN
• The AFN is due to the Participants by the
date the 5500 is filed.
• Page #13 - 2015 AFN (four pages).
• Majority of contents are the same for all
Plans.
• blah blah blah…
• Some portions are „plan specific‟.
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CASH BALANCE PLAN
2015 PBGC AFN
• How well funded is your plan?
• FTAP – FT & Assets (no 2015 benefits/ctb‟s)
• 2015 FTAP = 2015 SB Line 14.
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CASH BALANCE PLAN
2015 PBGC AFN
•
•
•
•
Plan assets can include discounted ctb‟s
12/31/15 Plan PVAB‟s = $1,429,853
12/31/15 430 FT + TNC = $1,356,913
12/31/15 AFN liabilities = $1,494,0693
85
85
CASH BALANCE PLAN
2015 PBGC AFN
• All these liabilities based on the same 12-31-15
accrued benefits.
• The difference in the values due to different
AEQ factors.
• PVAB based on Plan AEQ interest/mortality.
• FT + TNC based on the 430 segment rates
• PBGC AFN based on the PBGC issued rates in
effect on the last day of the Plan Year.
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86
CASH BALANCE PLAN
2015 PBGC AFN
• Page #14 – Asset percentage breakdown
87
87
CASH BALANCE PLAN
2015 PBGC AFN
• Page #15 - If something has changed, like
the plan being frozen or any other
amendment that affects benefits in 2016, it‟s
reported here
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88
CASH BALANCE PLAN
2015 PBGC AFN
• Page #16 – Small Plan Audit Exception.
• The language in this section and the
following asset breakdown is required to
avoid having to also provide an Summary
Annual Report (SAR)
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89
CASH BALANCE PLAN
2015 PBGC AFN
90
90
TRADITIONAL DB PLAN
2015 BENEFITS
• Handout 2 – Page #1
91
91
TRADITIONAL DB PLAN
2015 BENEFITS
• Page #1
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92
TRADITIONAL DB PLAN
2015 BENEFITS
• Page#2 – same assumptions as Cash
Balance Plan example
93
93
TRADITIONAL DB PLAN
2015 BENEFITS
• Census - Page #3a
• Ages & YOP same as Cash Balance sample
• YOS are different.
• Benefits are based on Hi 3 Average
Compensation
94
94
TRADITIONAL DB PLAN
2015 BENEFITS
• Benefits – Page #3b
• Rebecca EOY AB = EOY Hi 3 x .50% x 7 =
$2,513.89 x .005 x 7 = $87.99
• Rebecca‟s BOY AB = BOY Hi 3 x .50% x 6 =
$2,258.33 x .005 x 6 = $67.75
95
95
TRADITIONAL DB PLAN
2015 BENEFITS
• Many traditional DB plans are hard wired
with a .50% of pay formula that will typically
pass 401(a)(26) (the 40% test) organically
• unless the plan has excluded employees and/or
terminated employees with less than 1000 but
greater than 500 hrs.
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96
TRADITIONAL DB PLAN
2015 BENEFITS
• Benefits – Page #3b
• Naz EOY AB = EOY Hi 3 x 10% x 7 =
$11,916.67 x .10 x 7 = $8,341.67
• Naz BOY AB = BOY Hi 3 x .10% x 6 =
$11,222,22 x .10 x 6 = $6,733.33
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TRADITIONAL DB PLAN
2015 BENEFITS
• PVAB means the current lump sum.
• AEQ means 2 things that are considered
equal using the AEQ assumptions.
• Traditional DB plans PVAB is the greater of
• PVAB using Plan defined AEQ assumptions
• PVAB using IRS 417(e)(3) AEQ Assumptions
• Applicable Mortality & Applicable Interest
98
98
TRADITIONAL DB PLAN
2015 BENEFITS
• From Page #2 Plan Provisions
99
99
TRADITIONAL DB PLAN
2015 BENEFITS
• Rebecca‟s „Plan‟ PVAB = monthly accrued
benefit at NRA62 x APR62 discounted 33
years.
• $87.99 x 152.1573 = $13,388 (LS at NRA)
• PVAB = $13,388 ÷ (1.05)^33 = $2,676
10
0
100
TRADITIONAL DB PLAN
2015 BENEFITS
• 417(e) says to use the Applicable Mortality
Table and the Applicable Interest Rates.
• Applicable Mortality Table is the IRS issued
table for each Calendar Year.
• Applicable interest rates are based on three
segment rates.
• Segment 1 rate applies to benefit payments 0-5 yrs
Segment 2 rate applies to benefit payments in next 15yrs
• Segment 3 rate applies to benefit payments in next 20yrs
10
1
101
TRADITIONAL DB PLAN
2015 BENEFITS
• The Plan Document defines which
assumptions to use for 417(e) by defining a
Stability Period and a Lookback Month.
• Stability Period is the length of time during
which the plan will use the same Applicable
Interest Rates.
• Lookback Month defines which IRS monthly
417(e) segment rates will be used during the
Stability Period.
10
2
102
TRADITIONAL DB PLAN
2015 BENEFITS
• The plan document defines the terms with the
following options:
• Stability Period
One Month
One Plan Quarter
One Plan Year
One Calendar Quarter
One Calendar Month
• Lookback Month
1st month
2nd month
3rd month
4th month
5th month
• Averaging of any number (2-5) of any consecutive Lookback
Months if document specifies
10
3
103
TRADITIONAL DB PLAN
2015 BENEFITS
• Our plan defines Stability Period as 1 Year
and Lookback month is 1.
• The 12/31/15 417(e) PVAB is valued using:
• 2015 Applicable Mortality Table
• Table in effect on 1st day of Stability Period.
• December 2014 417(e) segment rates
• 1 month prior to the Stability Period that started on
1/1/15.
10
4
104
TRADITIONAL DB PLAN
2015 BENEFITS
• Rebecca 33 yrs away from NRA >20.
• Seg 1 Factor (5 years) = -0• no payments under 1.48% segment 1 rate
• Seg 2 Factor (15 years) = -0• No payments under 3.77% segment 2 rate
• Seg 3 Factor (remaining years) = 32.5757
• PV at 4.79% of deferred annuity payable at age 62
• 417(e) factor* = 0 + 0 + 32.5757 = 32.5757
• 417(e) PVAB = 87.99 x 32.5757 = $2,866
10
5
105
TRADITIONAL DB PLAN
2015 BENEFITS
• Page #4a
10
6
106
TRADITIONAL DB PLAN
2015 FUNDING
• FT & TNC - Page #4b
• TNC benefit = EOY AB - BOY AB
• Rebecca = $87.99 - $67.75 =
$20.24
• Naz = $8,341.67 - $6,733.33 = $1,608.34
10
7
107
TRADITIONAL DB PLAN
2015 FUNDING
• Valuation Results = Page #5
10
8
108
TRADITIONAL DB PLAN
2015 FUNDING
• Remember there is a MRC credit if assets
exceed FT, not to exceed TNC.
• $784,125 – $762,797 = $21,328
10
9
109
TRADITIONAL DB PLAN
2015 FUNDING
• 2015 MRC on 12/31/15
11
0
110
TRADITIONAL DB PLAN
2015 FUNDING
• Number of days between 9/15/16 - 12/31/15
= 259 days.
• $160,946 x 1.0612^(259/366) = $167,856*
• 2015 Recommended Funding = PVAB
(from Page #3b) – Assets =
• $1,128,464 – 784,125 = $344,339**
*round up to $167,900
**round up to $344,400
11
1
111
TRADITIONAL DB PLAN
2015 FUNDING
• Maximum contribution under 404 segment
rates.
11
2
112
TRADITIONAL DB PLAN
2015 FUNDING
• Sponsor confirms $167,900 deposited on
9/15/16.
• When a sponsor funds the minimum it
means the benefits are too high.
• If sponsor wants to fund this level in future
years the DB plan should be amended
(reduce Naz benefits)
• May run a preliminary and ask for expected
2016 trust returns to fit funding goals.
11
3
113