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tymesup
05-10-2007, 11:52 AM
Suppose an employee is eligible to participate in a floor/offset arrangement. As so often happens, further suppose the DB benefit is completely offset by the P/S account.

Is the employee considered a participant for PBGC purposes?

Is the employee entitled to a participant statement? Does vesting matter?

Thanks for any help!

Mark Cavazos
05-10-2007, 02:30 PM
I did not know there were any still around.

The employee is still a DB participant whether or not the employee gets a benefit from the plan. The $30 PBGC premium does not depend on whether the employee's benefit is $1 or $180,000.

What do you mean by a participant statement? Do you mean a benefit statement? If you do, it should include both the DB benefit and the DC balance. Otherwise an employee might get upset to see the DB benefit drop from one year to the next.

Vesting does matter. Even if the employee would not get a benefit from the DB plan now, a benefit might be payable if the employee terminates later.

By the way, who does the DB plan benefit? Is its administration a worthwhile expenditure for the company?

Kenny
05-10-2007, 02:48 PM
The employee is still a DB participant whether or not the employee gets a benefit from the plan. The $30 PBGC premium does not depend on whether the employee's benefit is $1 or $180,000.But it does matter if it is $0, doesn't it?
“Participant” in a plan means an individual (whether active, inactive, retired, or deceased) with respect to whom the plan has benefit liabilities.

a. Benefit liabilities are all liabilities with respect to employees and their beneficiaries under the plan (within the meaning of Code section 401(a)(2)). Thus, benefit liabilities include liabilities for all accrued benefits,
whether or not vested. In addition, a plan’s benefit liabilities include liabilities for ancillary benefits not directly related to retirement benefits, such as disability benefits not in excess of the qualified disability benefit, life insurance benefits payable as a lump sum, incidental death benefits, or current life insurance protection. (See Treasury Regulation § 1.411(a)-7(a)(1).)
I'm generally curious if the PBGC has any clarification discussing people with $0 liabilities. Take, for example, a traditional 1% x FAE x svc plan with no eligibility requirements but a 1000 hour service requirement. Someone who works 850 hours each year is a "participant" by the plan's definition but has $0 accrued benefit and $0 liability. It can also be reasonabely assumed they will never accrue a benefit. Should they be included in the PBGC participant count?

douglan
05-10-2007, 03:07 PM
My 2 cents: A participant with a $0 benefit is still a participant.

Kenny
05-10-2007, 03:20 PM
My 2 cents: A participant with a $0 benefit is still a participant.

Why?

tymesup
05-10-2007, 03:27 PM
They're pretty easy to sell. Large contribution for the principal; nothing for the rank and file. At least until the second year of the plan if the employer was foolish enough to give out raises or hire an older person.

PBGC reg 4006.6 says that an individual is a participant if the plan has benefit liabilities for that individual. Example 1 has an employee who enters the plan but does not have an accrued benefit who is therefore not counted as a participant. It appears that someone who is currently offset doesn't count.

Yes, I meant a benefit statement. ERISA 105(a) says to furnish a statement to participants with a nonforfeitable accrued benefit. It appears that someone who is currently offset doesn't get a statement, which is just as well. (If I wrote this section, I would give statements to everyone with an accrued benefit whether vested or not. In practice, everyone gets a statement, vested or not. There's no reason an employer shouldn't take a bow for providing a benefit.)

The plan does benefit the principal(s). It's not clear the same thing couldn't be achieved with a cash balance or other DB plan.

Thanks for the help. I couldn't find some of this stuff when I made the original post. Somehow, your reply pointed me in the right directions.

tymesup
05-10-2007, 03:29 PM
But it does matter if it is $0, doesn't it?

I'm generally curious if the PBGC has any clarification discussing people with $0 liabilities. Take, for example, a traditional 1% x FAE x svc plan with no eligibility requirements but a 1000 hour service requirement. Someone who works 850 hours each year is a "participant" by the plan's definition but has $0 accrued benefit and $0 liability. It can also be reasonabely assumed they will never accrue a benefit. Should they be included in the PBGC participant count?

PBGC reg 4006.6, Example 1, has an employee who enters the plan but does not have an accrued benefit who is therefore not counted as a participant.

Kenny
05-10-2007, 03:37 PM
PBGC reg 4006.6, Example 1, has an employee who enters the plan but does not have an accrued benefit who is therefore not counted as a participant.

Thanks I was just about to post that. I also found example 3 interesting. Not something I would have considered.
Example 3. On January 1, 2004, the plan is amended to provide that if a vested participant whose accrued benefit has a present value of $5,000 or less leaves employment, the benefit will be immediately cashed out. On December 30, 2005, Jane, who has a vested benefit with a present value of less than $5,000, leaves employment. Because of reasonable administrative delay in determining the amount of the benefit to be paid, the plan does not pay Jane the value of her benefit until January 9, 2006. Under the provisions of this section, Jane is treated as not having an accrued benefit on December 31, 2005 (the snapshot date for the 2006 premium), because Jane's benefit is treated as having been paid on December 30, 2005. Thus, Jane is not counted as a participant for purposes of computing the plan's 2006 premium.

douglan
05-10-2007, 05:02 PM
The exception for the deemed cash outs for terminated participants is not helpful here. An active participant with a $0 accrued benefit should still be considered a participant IMO (e.g., they are clearly a participant with respect to ERISA's disclosure rules).

ETA: I'm not sure about the PBGC reporting implications.

douglan
05-10-2007, 05:15 PM
Just took a quick look at PBGC reg sec. 4006.6.

I'm not sure it gets you there for excluding participants with $0 accrued benefits. Example 1 deals with a dollars times service plan where a participant does not work enough hours to get a year of benefit service after becoming eligible for the plan. The example concludes that such a participant does not have an "accrued benefit" and hence is not a participant for purposes of the PBGC premium reporting rules.

With respect to the plan we are discussing here (a floor offset plan), presumably, the participant has already satisfed all the requirements for having an "accrued benefit" -- it just happens that the amount of the accrued benefit is $0. I'd be "cautious" about excluding these individuals from premium reporting requirements (i.e., you may want to run it past your ERISA counsel).

Kenny
05-10-2007, 05:23 PM
The exception for the deemed cash outs for terminated participants is not helpful here. An active participant with a $0 accrued benefit should still be considered a participant IMO (e.g., they are clearly a participant with respect to ERISA's disclosure rules).

ETA: I'm not sure about the PBGC reporting implications.

I know. I just found it interesting bc I never would have interpreted in that manner.

douglan
05-10-2007, 05:25 PM
I know. I just found it interesting bc I never would have interpreted in that manner.

you and me both :)

Kenny
05-10-2007, 05:30 PM
Just took a quick look at PBGC reg sec. 4006.6.

I'm not sure it gets you there for excluding participants with $0 accrued benefits. Example 1 deals with a dollars times service plan where a participant does not work enough hours to get a year of benefit service after becoming eligible for the plan. The example concludes that such a participant does not have an "accrued benefit" and hence is not a participant for purposes of the PBGC premium reporting rules.

With respect to the plan we are discussing here (a floor offset plan), presumably, the participant has already satisfed all the requirements for having an "accrued benefit" -- it just happens that the amount of the accrued benefit is $0. I'd be "cautious" about excluding these individuals from premium reporting requirements (i.e., you may want to run it past your ERISA counsel).

I think the key phrase is "benefit liabilities", not accrued benefit. Is $0 a benefit liability?

douglan
05-10-2007, 05:52 PM
I think the key phrase is "benefit liabilities", not accrued benefit. Is $0 a benefit liability?

The conservative reading: I think once you cross the threshold for having an accrued benefit, then there is a corresponding benefit liability (even if it turns out to be $0). Plus, it won't get you into trouble when you pay your premiums. ;)

Malik Shabazz
05-10-2007, 06:07 PM
Suppose an employee is eligible to participate in a floor/offset arrangement. As so often happens, further suppose the DB benefit is completely offset by the P/S account.

Is the employee considered a participant for PBGC purposes?

Is the employee entitled to a participant statement? Does vesting matter?

Thanks for any help!For PBGC premium purposes, you can exclude the participant. See Q&A 9 from the 2001 EA Meeting Blue Book (http://www.pbgc.gov/practitioners/law-regulations-informal-guidance/content/page13190.html).*

For benefit statements, I have no idea, but Mark Cavazos had a very good suggestion: show the DB and DC benefits on a single statement to avoid angry calls when the DB benefit goes down.

* Note: The responses in the Blue Book do not represent the official position of PBGC and "cannot be relied upon by any person for any purpose." LOL

douglan
05-10-2007, 06:14 PM
dam u malik and your cursed research skills :swear:

:tup:

exactuary
05-10-2007, 06:44 PM
Are any of you troubled by how inadequate are standard valuation techniques for such plans? These plans are put options on a risky portfolio and should be valued using modern option valuation techniques.

An out-of-the-money option is often valuable. Those of you who have argued that a zero accrued benefit does not signify a nonparticipant appear to have an intuitive sense that there is value in the promise even if the AB is zero.

Using proper option techniques, the PVAB can be >0 even if the AB is, at this moment, zero.

Repeating my opening sentence, are any of you concerned that our traditional deterministic methods are woefully out of whack and out of date for valuing these liabilities?

Do you see your job and your career as compliance with rules made up by others (an ignorant Congress for example) or as actuaries applying financial techniques to risk measurement and risk management problems?

Are you ACTUARIES or are you mice?

Malik Shabazz
05-10-2007, 07:01 PM
Are any of you troubled by how inadequate are standard valuation techniques for such plans? These plans are put options on a risky portfolio and should be valued using modern option valuation techniques.

An out-of-the-money option is often valuable. Those of you who have argued that a zero accrued benefit does not signify a nonparticipant appear to have an intuitive sense that there is value in the promise even if the AB is zero.

Using proper option techniques, the PVAB can be >0 even if the AB is, at this moment, zero.

Repeating my opening sentence, are any of you concerned that our traditional deterministic methods are woefully out of whack and out of date for valuing these liabilities?

Do you see your job and your career as compliance with rules made up by others (an ignorant Congress for example) or as actuaries applying financial techniques to risk measurement and risk management problems?

Are you ACTUARIES or are you mice?For IRS purposes, I don't think anything but deterministic procedures are permitted. I'm not sure whether alternative models might pass muster under FASB rules.

Some actuaries are starting to pay attention. See section 3.9 of the latest exposure draft (http://www.actuarialstandardsboard.org/exposure.htm) of ASOP No. 4:Some plan provisions may create contingent pension obligations that are difficult to measure using deterministic assumptions or procedures. Examples of such plan provisions include the following:

a. the use of favorable investment returns to provide cost-of-living increases automatically to retirees; and

b. floor-offset provisions that provide a minimum defined benefit in the event a participant’s account balance in a separate plan falls below some threshold.

In such circumstances, the actuary should consider whether deterministic assumptions or procedures appropriately measure the value of such plan provisions. The actuary may consider using alternative actuarial assumptions or procedures, such as stochastic modeling, option-pricing techniques, or an assumption that includes an adjustment to reflect the plan provisions that were not explicitly valued.

Malik Shabazz
05-10-2007, 07:08 PM
dam u malik and your cursed research skills :swear:

:tup: :toth:

I have a shelf in my office with copies of the EA meeting Grey Books and Blue Books, and similar Q&A's from ABA, ASPA, and CCA meetings (at least those I've managed to accumulate). :geek: This seemed like the sort of question that an actuary or a lawyer would have asked the PBGC at some point. :study:

exactuary
05-10-2007, 07:09 PM
in re ASOP 4 quote: excellent

to rephrase Douglan's last post: Malik, you da man!

tymesup
05-10-2007, 11:57 PM
Are any of you troubled by how inadequate are standard valuation techniques for such plans? These plans are put options on a risky portfolio and should be valued using modern option valuation techniques.

An out-of-the-money option is often valuable. Those of you who have argued that a zero accrued benefit does not signify a nonparticipant appear to have an intuitive sense that there is value in the promise even if the AB is zero.

Using proper option techniques, the PVAB can be >0 even if the AB is, at this moment, zero.

Repeating my opening sentence, are any of you concerned that our traditional deterministic methods are woefully out of whack and out of date for valuing these liabilities?

Do you see your job and your career as compliance with rules made up by others (an ignorant Congress for example) or as actuaries applying financial techniques to risk measurement and risk management problems?

Are you ACTUARIES or are you mice?

I don't think it's appropriate to recommend paying 30 premiums per person per year for insurance that is extremely unlikely to pay any claims.

Granting that the zero may have a positive PVAB, it may turn out that the principal's PVAB may be overvalued with a traditional deterministic method. It may also be impossible to run a stochastic valuation cheaply enough to make it feasible.

I would rather not promise the zero any benefit and perhaps surprise him later on. It does appear I must give him an SPD and then explain he's not getting anything.

exactuary
05-11-2007, 04:06 AM
I don't think it's appropriate to recommend paying $30 premiums per person per year for insurance that is extremely unlikely to pay any claims.So you would like PBGC premiums to be genuinely risk-adjusted with some plans paying $1000/person/year.

Granting that the zero may have a positive PVAB, it may turn out that the principal's PVAB may be overvalued with a traditional deterministic method. It may also be impossible to run a stochastic valuation cheaply enough to make it feasible.You don't need to run a stochastic valuation. You have an "exchange" option (aka a "Margrabe" option) which can be worked into a closed form. See, e.g., http://www.bus.lsu.edu/academics/finance/faculty/dchance/Instructional/TN98-04.pdf Admittedly, this won't be all that easy in practice in a plan where benefits continue to accrue and contributions continue to be made to the DC plan. Off the top of my head, contributions can probably be treated as negative dividends. The continued DB accruals may be trickier.

tymesup
05-11-2007, 11:41 AM
So you would like PBGC premiums to be genuinely risk-adjusted with some plans paying $1000/person/year.

You don't need to run a stochastic valuation. You have an "exchange" option (aka a "Margrabe" option) which can be worked into a closed form. See, e.g., http://www.bus.lsu.edu/academics/finance/faculty/dchance/Instructional/TN98-04.pdf Admittedly, this won't be all that easy in practice in a plan where benefits continue to accrue and contributions continue to be made to the DC plan. Off the top of my head, contributions can probably be treated as negative dividends. The continued DB accruals may be trickier.

If PBGC premiums had been risk-adjusted all along, they would have never gotten up to 1000/person/year.

It's not clear that the existence of the PBGC has helped DB plans. It has enabled employers to claim that benefits were guaranteed, which may not have been the case.

tymesup
05-16-2007, 02:15 PM
It appears that folks who are offset have a strange treatment.

According to PBGC, since they are participants, the plan covers non-owners. Ergo, it is a PBGC plan. Since they are offset, there's no premium.

Since they have no accrued benefit, they do not have to receive a benefit statement. However, since they are participants, they are entitled to ask for a statement which must then be provided.

If I could have hit the curveball, I wouldn't have to deal with this stuff. Perhaps I was going to get curveballs no matter what.