Archive for October, 2008

Benefits Conference of the South

October 17th, 2008

I just got the email from ASPPA with the conference brochure. This meeting will be in Atlanta, GA on January 15-16, 2009:

Looks like I’ll be on the podium with Jim Holland to talk about “PPA 06 Funding Issues”. Darn, instead of 2 days to cover the topic, we only have 1 hour and 15 minutes!


DRC versus AFC versus Shortfall base exemption

October 10th, 2008

A few students have pointed out that some of my practice problems are not 100% clear. Well, yeah, DUH – this is PPA 2006 we’re talking about, right?!

The issue has to do with IRC 430 and single employer plans. When determining the exemption from establishing a shortfall amortization base, a plan may be able to use an applicable percentage that is less than 100%.

IRC 430(c)(5) has several criteria the plan must meet. One of them is that the plan was not subject to the 412(l) Deficit Reduction Contribution in 2007. In some of my practice problems, I make this statement: “The 412(l) Deficit Reduction Contribution for 2007 is zero”. But that is not necessarily the same as saying that “the plan was not subject to the 412(l) Deficit Reduction Contribution in 2007”.

It is definitely possible for a plan to be subject to 412(l) in 2007, and yet the value of the DRC is zero. You are supposed to interpret the statement in the problem about a zero DRC to also imply that the plan was not subject to 412(l).

Based on my review of the 2007 exam, they avoided any potentially unclear language on the exam problems. Next year, I will clarify the language in my practice problems.


There is additional detail in the proposed regualtion on this idea. It states that the transition rule “does not apply to a plan … that was subject to 412(l) for the pre-effective year ….” The regulation makes it clear that a plan can be subject to 412(l), and also have a zero DRC.

The proposed regulations are not on the EA-2A syllabus. In 2008, the EA-2A exam questions have to be based solely on the Internal Revenue Code. You should not worry about details in the proposed regulation.


Cost Methods practice problems 12 and 13

October 3rd, 2008

Several students have asked for more explanation on the difference in the solutions for these two problems.

It can be confusing when you look at pre-PPA 2006 problems. Now there are different rules for single employer plans and multiemployer plans. I tried to clarify the different rules in Cost Methods practice problems 12 and 13. They are very similar problems, except that #13 is for a single employer plan, and #12 is for a multiemployer plan.

Problem 12 – Multiemployer
The cost method is given as Unit Credit, and there is a salary scale. Since this is a multiemployer plan, the actuary is subject to the 1.412(c)(3)-1 regulation on reasonable funding methods. That means they must use Projected Unit Credit to calculate the normal cost. That is why the normal cost is based on projection of pay to assumed retirement age.

Problem 13 – Single Employer
The cost method (and valuation rate of interest) is NOT given. Under PPA, you must use the traditional Unit Credit method to calculate the Funding Target and the Target normal cost. There is a salary scale, which would be used to calculate the accrued benefit a the end of the year (for the Target normal cost).

The point of the problem is that it IS possible to ask for calculations based on something other than traditional Unit Credit. The question asks you to use Projected Unit Credit to calculate the normal cost.

404(0) Cushion amount – Single Employer
The 404(o) cushion amount is defined as the sum of 50% of the Funding Target, plus the increase in the Funding Target due to projection of future salaries. The second part can be calculated as the Projected Unit Credit accrued liability, minus the Funding Target.


Old 414(l) / 415 / 416 Questions

October 3rd, 2008

I have gotten emails from several students asking about the 414(l) / 415 / 416 questions on prior EA-2B exams.

There is no need to look at any old 414(l) questions. Most of the problems test stuff that was on the EA-2B syllabus, but that material is NOT on the EA-2A syllabus.

For 415 questions, ALL of the EA-2B questions are based on the old 415 regulation – so don’t bother looking at those. I will be revising / creating new 415 practice problems.

You can look at the EA-2B problems on 416 for years 2002-2007. Prior to 2002, the 416 problems were based on old rules that were changed by EGTRRA in 2001.