Defining and Using Compensation in Defined Contribution Plans

Transcription

1 Bryan, Pendleton, Swats & McAllister, LLC November/December 2015 Developments RECENT DEVELOPMENTS IN EMPLOYEE BENEFITS Defining and Using Compensation in Defined Contribution Plans by Susan Lozanov, ERPA, CPC When we hear the word compensation, most of us probably think about the dollars that show up as gross pay on our pay stubs, but that isn t necessarily compensation for qualified retirement plan purposes. There are multiple definitions of compensation, and depending on the definition your plan uses, the results can be quite different. Compensation is used for many different purposes in defined contribution (DC) plans. For certain purposes (limits and tests), a plan must use Internal Revenue Code 415(c)(3) compensation or 414(s) compensation. For other purposes, such as calculating contributions, a plan may use any consistently applied, reasonable definition of compensation that does not favor highly compensated employees and passes nondiscrimination testing. The involved parties (employers, plan sponsors, payroll managers, administrators, recordkeepers, and consultants) of a DC plan should take steps to ensure that compensation, as defined in the plan document, is accurately reported. Making corrections to avoid disqualification can be very costly if the incorrect definition of compensation is used. The various definitions that satisfy the 415 and 414 requirements are discussed in the following paragraphs. Section 415 compensation Often referred to as gross compensation because it includes most types of compensation, 415 compensation must be used to determine compliance with 415 limits on contributions and benefits, which employees are highly compensated employees (HCEs), which employees are key employees, compensation and deduction limits, and top heavy minimum contributions. It may be used for all other plan purposes. Purpose (s) Reasonable Limits Determine HCEs and key employees Also in this issue: Year-End Health Coverage Reporting Requirements 5 Bipartisan Budget Act of Yes No No 415 limits Yes No No Deduction limits Yes No No Plan imposed deferral limit Tests Yes Yes Yes Coverage - ABT 1 Yes Yes No ADP/ACP test Yes Yes No General nondiscrimination test Yes Yes No Permitted disparity Yes Yes No Allocations Deferrable compensation Yes Yes Yes Match contribution Yes Yes Yes Profit sharing contribution Yes Yes Yes Safe harbor allocation Yes Yes No Minimum gateway Yes Yes (⅓ test only) A Longer Life Expectancy Does Have Its Downside 8 No Top heavy minimum Yes No No BPS&M Pension Liability Index 10

2 The statutory definition of 415 compensation, also known as current includible compensation, is found in 1.415(c)-2(b) and -2(c) of the regulations. Current includible compensation includes wages; salaries; fees for professional services; commissions; elective deferrals to defined contribution plans, a 125 plan, and transportation benefit arrangements; tips; bonuses; fringe benefits; reimbursements or expense allowances under a non-accountable plan; and other amounts received for personal services rendered in the course of employment with the employer, regardless of the form of payment. The regulations also provide three safe harbor definitions of 415 compensation that may be used by a plan: 415(c) simplified compensation under 1.415(c)-2(d)(2) 3401(a) wages for income tax withholding under 1.415(c)-2(d)(3) 6051 W-2 wages (Box 1) under 1.415(c)-2(d)(4) The 415(c) simplified compensation definition is similar to the statutory definition and includes wages, salaries, fees for professional services, elective deferrals, and other amounts received for personal services rendered in the course of employment. Unlike the statutory compensation definition, simplified compensation does not include amounts received for: medical and disability benefits reimbursements of moving expenses stock options granted a 83(b) election with respect to restricted property The second safe harbor definition of 415 compensation is wages for income tax withholding, which includes all compensation subject to federal income tax withheld at the source plus elective deferrals to: a cafeteria plan a defined contribution plan a qualified transportation fringe benefit arrangement Unlike the statutory and simplified definitions, this definition includes income from restricted property that is no longer subject to a substantial risk of forfeiture under 83, distributions received from a nonqualified plan, and income from the exercise of nonstatutory stock options, but it does exclude income from excess group term life insurance. The third and final safe harbor definition of 415 compensation is W-2 wages. The only significant difference between wages for income tax withholding and W-2 wages is that W-2 wages includes income from excess group term life insurance. All definitions of 415 compensation include: salary, wages, overtime, bonus, commissions elective pretax deferrals or contributions, including catch-up contributions taxable fringe benefits (such as company car, gift cards) expense accounts (not reimbursements) differential wage payments (active duty military for more than 30 days) post-severance compensation meeting the 2½ month rule All definitions of 415 compensation exclude: severance pay and parachute payments nontaxable fringe benefits expense reimbursements workers compensation nonqualified plan contributions in the year contributed statutory stock options An important consideration for 415 compensation is post-severance compensation. For post-severance pay to be included, it must be (1) paid within 2½ months after severance of employment or the end of the limitation year that includes the date of severance if later and (2) would have been paid if the employee had continued employment (for example, vacation or sick days, overtime, bonuses, and commissions). Severance pay that is provided to a terminating employee as an additional unearned payment (for example, a payment based on length of service) is not included in postseverance compensation. There are few differences among the 415 compensation definitions, and for most employees it will not matter which definition a plan uses. The Compensation type table, which appears on the following page, highlights differences among the various 415 compensation definitions. Section 414(s) compensation 414(s) compensation is often referred to as nondiscrimination compensation. There are several definitions of 414(s) compensation that a plan can use including: any compensation that satisfies 415 the safe harbor definitions under 414(s), which are definitions of 415 compensation with certain specified adjustments any reasonable definition of compensation that does not favor highly compensated employees All nondiscrimination testing must be performed using compensation that satisfies 414(s), and there are two 2 Bryan, Pendleton, Swats & McAllister / November-December 2015

3 Compensation type Statutory definition Simplified compensation Wages for income tax withholding W-2 compensation Amounts realized when restricted property becomes freely transferable or no longer subject to substantial risk of forfeiture Income attributable to 83(b) election Excluded Excluded Included Included Included Excluded Included Included Nonqualified plan distributions Excluded unless plan provides otherwise Excluded unless plan provides otherwise Included Included Nonstatutory stock option includible in income in year granted Nonstatutory stock option includible in income in year of exercise Included Excluded Included Included Excluded Excluded Included Included Tips Included, but allocated tips may be excluded Included, but allocated tips may be excluded Excludes allocated tips, noncash tips, and tips under $20 per month Same as wages for income tax withholding Nonqualified moving expense reimbursements Included Excluded Included Included Excess group term life insurance Included Included Excluded Included Taxable medical or disability benefits Included Excluded Included Included ways to do this: (1) use a 414(s) safe harbor definition for testing or (2) use a consistently applied, reasonable definition for testing and perform a 414(s) compensation ratio test to demonstrate that the definition is satisfactory. A plan may exclude the following forms of compensation and still meet the 414(s) safe harbor definition of compensation: fringe benefits, reimbursements, moving expenses, distributions received from a nonqualified plan, and welfare benefits (if one of these items is excluded, all must be excluded) elective deferrals (optional) amounts that apply only to some or all HCEs Any modification other than modifications listed in the 414(s) regulations will create an alternative definition of compensation, which must be tested under 1.414(s)-1(d). For example, let s assume a plan does not use a safe harbor definition for allocating contributions and that payroll provides only match-eligible compensation, which excludes overtime. There are two options: (1) to perform the actual contribution percentage (ACP) test using a 414(s) definition or (2) perform the ACP test using the provided compensation exclusive of overtime and satisfy a 414(s) compensation ratio test. In either case, an additional compensation amount must be provided for testing. The plan will satisfy the 414(s) compensation ratio test if the HCE ratio of eligible compensation to 414(s) compensation does not exceed the non-highly compensated employee (NHCE) ratio by more than a de minimus amount. The IRS has frequently used 3%, but each plan is viewed on a facts and circumstances basis. Only employees included in the applicable nondiscrimination test are included in the 414(s) test. In our example, only the match-eligible employees included in the ACP test would be included in the 414(s) compensation ratio test. If the plan fails the 414(s) test, a different definition of compensation must be used to perform nondiscrimination testing. If employees received the same profit sharing contribution percentage when using the non- 414(s) compensation but different rates when dividing by 414(s) compensation, an additional test the 401(a)(4) general nondiscrimination test will be triggered. For example, if Bryan, Pendleton, Swats & McAllister / November-December

4 the plan allocates employer contributions on compensation net of bonus, the employees who receive a bonus will receive a smaller percentage of an employer contribution than they would receive when considering their pay including bonus. Reasonable compensation For allocations not requiring 415 or 414(s) compensation, a plan may use any reasonable definition of compensation. Reasonable compensation may be used to calculate allocations and accruals, such as the maximum permitted deferrals within a 401(k) plan and employer matching contributions on behalf of each plan participant. The modifications for reasonable compensation are: irregular or additional compensation, overtime, bonuses, shift differential premiums, call-in premiums, commissions, and compensation over a specified dollar amount. Two specific exclusions not permitted under Treasury Regulation 1.414(s)-1(d)(2)(iii) are (1) a percentage of another compensation definition in the plan document and (2) compensation for a one-month period. Impact of different compensation definitions The compensation definition a plan sponsor chooses affects the complexity of the plan, nondiscrimination testing, and the contribution allocations. Compensation must be tracked and reported accurately the more complex or customized the definition, the more difficult it is to track and report. If the definition does not meet one of the 414(s) safe harbor definitions, the sponsor must provide another set of compensation figures for nondiscrimination testing. The example that appears at the bottom of this page illustrates how different compensation definitions can affect a 2015 pro rata profit sharing allocation. The examples assume that an employee receives a nonqualified plan distribution of $50,000 that is included in the W-2 definition but excluded in the statutory definition. As you can see, changing the compensation definition from the statutory definition to the W-2 definition provides a greater profit sharing contribution to HCE 1, while decreasing the profit sharing contribution to all other employees, including HCE 2. This illustrates the significance plan sponsors must place on the compensation definition they choose and the importance of having and using the appropriate and correct compensation. In perspective The regulations governing compensation are complex, and because DC plans are permitted to use different definitions of compensation for different purposes, knowing which definition of compensation to use can be confusing. Each new definition of compensation increases the chance of errors, and plan administrators will often use one 415 definition of compensation for everything to avoid the complexities of reviewing different elements of payroll for different purposes and to avoid performing the 414(s) compensation ratio test. Common plan failures related to compensation include not following the plan terms, not using a safe harbor definition in a safe harbor plan, and not testing the compensation definition for nondiscrimination. The plan Statutory 415 Definition W-2 Definition Employee Compensation Profit Sharing Allocation Compensation Profit Sharing Allocation Change in PS Allocation HCE1 $200,000 $6,154 $250,000 $7,143 $989 HCE2 150,000 4, ,000 4, NHCE1 20, , NHCE2 40,000 1,231 40,000 1, NHCE3 60,000 1,846 60,000 1, NHCE4 80,000 2,462 80,000 2, NHCE5 100,000 3, ,000 2, Total $650,000 $20,000 $700,000 $20,000 4 Bryan, Pendleton, Swats & McAllister / November-December 2015

5 sponsor should work carefully with recordkeepers and consultants to ensure accurate compensation is reported. When working with compensation, some questions to ask include: Is payroll reporting the correct compensation numbers according to the plan document and IRC regulations? Have the compensation numbers been reviewed following changes in personnel or payroll? Is the appropriate compensation definition being used for each purpose? The plan sponsor can minimize errors by reconciling W-2 and payroll records, and by making sure the definition of compensation used matches the definition in the plan document. Susan Lozanov, ERPA, CPC Before joining BPS&M in 1998, Susan was a registered stockbroker for several years with Charles Schwab. She provides administration and consulting for defined contribution plans, including employee stock ownership plans (ESOPs), and she specializes in advanced compliance testing. Susan received a BA in Economics and Spanish from Vanderbilt University. She is a Certified Pension Consultant, Qualified Pension Administrator, Qualified 401(k) Plan Administrator, and Enrolled Retirement Plan Agent. She is a consultant in our Nashville, TN office. 1 A plan that uses 410(b) fail safe language and the average benefit test (ABT) must have a 414 acceptable definition of compensation written into the plan. Year-End Health Coverage Reporting Requirements by Leah Sardiga, ASA, MAAA The IRS has released final forms and instructions to be used by employers to report the new required information under Sections 6055 and 6056 of the Internal Revenue Code. These mandatory forms, related to health coverage during calendar year 2015, are due to the IRS and full-time employees in early All Applicable Large Employers (employers with 50 or more full-time employees, including full-time equivalent employees) must file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. This form provides information on the health coverage offered to the employee. Under the Affordable Care Act (ACA) employer mandate, large employers are required to provide employees with affordable coverage of a minimum value. The IRS will use the information in this form to decide whether the employer is compliant with the employer mandate. The form will also be used to determine an employee s eligibility for premium tax credits on the exchange. In addition, the employee s enrollment status is disclosed to determine whether the individual mandate requirement of the ACA has been satisfied. A 1095-C is due to each full-time employee by February 1, A copy of each Form 1095-C must be filed with the IRS. The filing deadline with the IRS is February 29, 2016, if filing by mail or March 31, 2016, if filing electronically. Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information, is a short, general form that employers must file with the IRS along with the 1095-Cs. This form summarizes the employer s information and the number of 1095-Cs being filed. The form is due to the IRS no later than February 29, 2016 or March 31, 2016 if filed electronically. For more information, please see IRS Publication 5196: Leah Sardiga, ASA, MAAA Leah joined BPS&M in 2012 as a member of the firm s health and welfare actuarial practice. In her current role, she performs GASB 45 and SFAS 106 valuations, rate settings for self-insured plans, and network discount analysis. Leah received a BA in Mathematics and Economics, summa cum laude, from Case Western Reserve University. Leah is an Associate of the Society of Actuaries and a Member of the American Academy of Actuaries. Leah serves on the Developments editorial board and is a consulting actuary in our Nashville, TN office. Bryan, Pendleton, Swats & McAllister / November-December

6 Bipartisan Budget Act of 2015 Includes Pension and Healthcare Changes by Jeffrey Thornton, ASA, EA, MAAA President Obama recently signed the Bipartisan Budget Act of 2015 (BBA 2015), enacting further changes for pension and healthcare plan sponsors. BBA 2015 contains more premium increases for the Pension Benefit Guaranty Corporation and also extends the funding relief used for determining required contributions that were part of Moving Ahead for Progress in the 21 st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA). The changes are intended to increase revenue through higher premiums to the PBGC, as well as indirectly raising the corporate tax rate by reducing tax-deductible contributions to pension plans to the extent that a plan sponsor relies on the additional funding relief provisions. BBA 2015 also repeals the Affordable Care Act s (ACA) requirement that employers with more than 200 employees automatically enroll new employees in health coverage. Private sector pension plan provisions PBGC premiums to rise. BBA 2015 increases the PBGC fixed-rate premiums for single-employer plans by approximately seven to eight percent beginning in 2017 through The provisions also increase the variablerate premium for single-employer plans but not the PBGC Premium Rates for Single-Employer Pension Plans Year Flat-Rate Premiums 1 Variable-Rate Premiums 2 Variable-Rate Premium Cap (Per Participant) 2015 $57 $24 $ $64 $30 $ $69 $333 $5, $74 $373 $5, $80 3 $413 $5,003 per-participant cap basis. The fixed-rate and variablerate will still be indexed for inflation each year. PBGC s multiemployer premium of $27 in 2016 will remain the same. The table below provides the scheduled premium rates per PBGC.gov. Accelerated pension payment due date. BBA 2015 also accelerates the payment due date for the 2025 plan year only. Pension premium payments will move forward by one month in 2025 (from the 15th day of the tenth calendar month of the year to the 15th day of the ninth calendar month). For calendar year plans, this would be a change from October 15, 2025 to September 15, This adds an additional year of premium revenues to the federal government s ten-year budget window. Extension of interest rate corridors. The interest rate corridors, which were put in place in 2012 by MAP-21 and revised in 2014 by HATFA, are further revised in BBA The 90 percent to 110 percent interest rate corridor, currently in effect through 2017, is extended for three more years and will remain in effect through The corridor will then increase by five percent each year through Beginning in 2024, the corridor widens to span from 70 percent to 130 percent. The funding relief comes by restricting the interest rates used Bipartisan Budget Act of 2013 Bipartisan Budget Act of The flat-rate premium is equal to the amount in the table above multiplied by the PBGC Premium Rates for the number of participants 2 The variable-rate premium is equal to the amount in the table above for each $1,000 of unfunded vested benefits (subject to the per-participant cap) 3 Rates as noted above are subject to indexing, and therefore may be higher than the amount shown. After 2019, all rates are subject to indexing. There are no scheduled increases (other than indexing) for years after to value liabilities to a narrow corridor around a 25-year average of investment grade corporate bond rates. Since these rates have been higher in the past, this creates higher-than-market interest rates and results in lower liabilities and minimum required contributions through The table on the following page compares the interest rate corridors under MAP-21, HATFA, and BBA Expanded options for mortality tables. Under current law, upon request by the plan sponsor and approval by the IRS, a plan may use its own mortality tables. Currently, plans must have a sufficient number of plan participants to justify an alternative table, and the plans must have been 6 Bryan, Pendleton, Swats & McAllister / November-December 2015

7 maintained long enough to have credible information. BBA 2015 provides plan sponsors the ability to use their own mortality tables. This option is available provided the plan has credible information generated in accordance with established actuarial credibility theory, and the information is materially different from the current IRS standards. Further guidance from the IRS is currently being requested regarding this issue. Plan Year MAP-21 Corridor Range to 125% HATFA Corridor Range 90 to 110% to 115% to 120% to 130% 75 to 125% Budget Act Corridor Range 90 to 110% 85 to 115% to 120% to 130% 75 to 125% 2024 and later 70 to 130% Health care provisions The Budget Act of 2015 repeals the ACA provision requiring employers with more than 200 full-time employees to automatically enroll new employees in health coverage and continue enrollment of current employees. This repeal provides permanent relief for larger employers, since the Department of Labor has not yet issued regulations to implement this provision of the ACA. In perspective With the passage of the 2015 Bipartisan Budget Act, plan sponsors have extended funding relief for their plans; although, this relief may come at a later cost as funding relief wears away in the future. The continued increase in PBGC premiums may cause pension plan sponsors to consider or reconsider risk transfer programs, such as lump sum windows or annuity purchases, in an effort to reduce risk to the plan sponsor and reduce PBGC premiums. The repeal of automatic medical plan enrollment for new employees relieves larger employers from administrative burdens and cost. For more information, contact your BPS&M consultant. Bryan, Pendleton, Swats & McAllister / November-December

8 A Longer Life Expectancy Does Have Its Downside IRS Expected to Adopt RP-2014 for Defined Benefit Plan Funding by Adam Gray, FSA, EA, CERA, MAAA, and Noel Whitehurst, FSA, EA, CERA, MAAA Background Fifteen years have passed since the Society of Actuaries (SOA) published the retirement plan mortality table RP-2000, and during the intervening years life expectancy has increased. The SOA has measured this improvement and released an updated mortality table, RP This new table will affect everything from a private sector defined benefit plan s funded status to its minimum required contributions (MRC), lump sum benefit determinations, and Pension Benefit Guaranty Corporation (PBGC) variable-rate premiums. Recognizing the increase in life expectancy, many defined benefit plan sponsors and their auditors have already adopted RP-2014 to reflect the most recent experience in development of their financial statements. actuarial funding calculations for ten years with identical assumptions except for the funding mortality assumption. The following graph illustrates how switching from the current IRS mortality table in 2016 to the RP-2014 table in 2017 immediately increases the plan sponsor s MRC by 31 percent. The effect of changing funding mortality assumptions to RP % 30% 25% 20% Change in MRC Change in Funding Target The IRS, however, has been more deliberate in adopting 15% RP-2014, and following the release of RP-2014 mortality 10% tables with the MP mortality improvement scale, actuaries have been guessing when (or if) the IRS will adopt some form of the new table for determining minimum required contributions. The IRS has already 5% 0% - 5% released mortality tables for 2016, so we expect that the -10% IRS could begin using the RP-2014 mortality tables in 2017; although, the extent of the mortality improvement projection and the possible phase-in are unknown Projection Year This article focuses on the potential impact to private sector defined benefit plans of the RP-2014 mortality table with the full MP-2014 improvement scale if adopted by the IRS. When compared with other possible scenarios, our model finds that generally the application of RP-2014 in combination with MP-2014 will result in the greatest increase in pension liabilities and required minimum contributions. RP-2014 impact on funding We will first analyze the impact a change in the mortality assumption will have on minimum funding requirements for a closed, accruing defined benefit plan (i.e., the plan is closed to new participants but continues to accrue benefits for existing participants). The plan has an average rate of benefit accruals and what we consider to be typical early retirement provisions. We projected Under current rules, the additional funding shortfall created by the change in mortality will be amortized over seven years, provided all assumptions are met. At that point, contributions should return to levels that are comparable to the levels generated when using the current IRS mortality table. This is represented by the dramatic drop in the change in the minimum required contribution in Plan sponsors typically dread assumption changes that increase pension liabilities and contributions. However, if a sponsor is thinking about terminating its plan in the next ten years, this potential update to the law may be helpful, especially if the sponsor is not aware of the actual cost to terminate its plan. The cost to buy annuities from insurance companies for a plan termination is developed using assumptions more 8 Bryan, Pendleton, Swats & McAllister / November-December 2015

9 conservative than those required by law. The move to RP-2014 for minimum funding purposes helps reduce the final catch-up contribution required to terminate an under funded plan. So using RP-2014 may be beneficial for sponsors that are considering terminating their plans in eight to ten years, but what about plan sponsors that want to maintain their plans and will have to deal with a larger pension liability? Fortunately, there is a silver-lining if the plan sponsor can look beyond the next ten years. Since changing the funding mortality does not change the ultimate cost of the plan, the higher contributions that immediately follow adoption of RP-2014 should reduce contributions in later years. For a closed, accruing plan that has asset returns near the effective liability returns, contributions could eventually (ten or more years out) be lower than they would be if the IRS doesn t adopt the new mortality table. What about lump sums? In the discussion so far, we have been concerned with what the IRS might impose on private sector plan sponsors in terms of minimum contribution requirements. Plan sponsors must keep in mind, however, that the above scenario is actually a cost-shifting of future contributions to the present. The ultimate cost of the plan is not affected, because the amount of benefits and the lifetime over which they are paid are not influenced by the valuation assumptions prescribed by the IRS. This is not the case, however, for plans that pay lump sums. The IRS also prescribes the mortality assumption plans must use to calculate the minimum lump sum payable to participants. Through 2016, the IRS will use the same method to establish this assumption that it has used since the Pension Protection Act went into effect in Similar to the IRS tables used for minimum funding, we expect that starting in 2017, the IRS will adopt some form of the RP 2014 table for lump sum calculations. As in the above projections, we are considering the possible outcome where lump sums will increase by the greatest magnitude for plan sponsors; that is, the IRS adopts the RP-2014 table with a full MP-2014 mortality improvement scale to pay lump sums. This change would cause plan sponsors to pay higher lump sums than otherwise, and this particular set of mortality assumptions produces the largest lump sums, thus leading to the highest required funding by the plan sponsor. Unlike the cost-shifting described for a plan without lump sums, this is an actual cost increase for plans with lump sums. The new mortality table produces lump sums six percent to eight percent larger than the current mortality assumption. If we take our benchmark plan, add a lump sum option, and assume everyone is paid a lump sum at retirement, we still see the seven-year increase in minimum funding requirements before the plan returns to pre-update levels. However, our plan is expected to pay an additional four percent to five percent in actual benefit payments over the projection period due to the increase in the lump sum portion of distributions. The additional asset return from earlier contributions (our silver-lining ) is offset by higher lump sum payments. Plans that pay lump sums above $5,000 are also subject to additional funding requirements to permit payment of those lump sums. In order for a plan to continue paying unlimited lump sums to participants, it generally must remain at least 80 percent funded, based on the calculations required by the IRS. So a plan that is barely 80 percent funded on the current mortality basis will have to fund 80 percent of the entire difference due to the mortality change immediately, just to protect the ability to pay lump sums. Only the remaining 20 percent of the change is amortized over seven years. In our benchmark plan with lump sums and an 80 percent funded status on the current mortality basis, we project a 60 percent increase in the first year s contribution to remain 80 percent funded. This is in lieu of the approximately 30 percent increase as calculated without the 80 percent target. Interestingly, the total expected contributions over the first ten years are not that different regardless of whether 80 percent is the funded status target. This is another example of cost-shifting to earlier periods. Part of this is speculation about the future of IRS policy. The IRS could prescribe a less severe version of the new mortality table with lower projected improvement, or it could phase-in the new mortality information. This would certainly slow down the increase in minimum funding requirements and lump sums but not eliminate it. In any case, we expect lump sum values to be higher in the future. Plan sponsors on the fence about whether or not to de-risk their plans by offering terminated, vested participants a lump sum window should consider the desire, if any, to avoid this expected future cost increase by offering lump sums before the new mortality rates go into effect. In perspective Plan sponsors should be aware of the impact that the upcoming change in funding and lump sum distribution amounts may have on their defined benefit plans and plan accordingly. In general, the older the mortality table Bryan, Pendleton, Swats & McAllister / November-December

10 currently in use by the plan, the higher the expected increase in liabilities and required contributions. Sponsors who plan to use lump sums as a de-risking mechanism may want to accelerate the process. Sponsors should keep in mind that the degree to which any particular plan is affected is highly dependent on the plan s design, current level of funding, participant demographics, and other plan sponsor-specific variables. Please contact your BPS&M consultant to discuss how this may impact your plan. 1 In October, the SOA released the MP-2015 mortality improvement scale. MP-2015 reflects longevity rates that are lower than those assumed in MP-2014; thus, pension obligations measured using MP-2015 will be slightly lower than those based on MP Adam Gray, FSA, EA, CERA, MAAA Adam has extensive experience in the design, funding, accounting disclosure, and administration, and regulatory compliance of defined benefit pension plans. He possess in-depth experience in a wide variety of pension plan designs, including qualified and nonqualified plans. Adam was instrumental in the development of the Wells Fargo Pension Discount Curves. Adam earned a BS in Quantitative Finance and a MS in Applied Statistics from the University of Alabama. He is a Fellow of the Society of Actuaries, an Enrolled Actuary, a Chartered Enterprise Risk Analyst, and a Member of the American Academy of Actuaries. Adam is a consulting actuary in our Nashville, TN office. Noel Whitehurst, FSA, EA, CERA, MAAA Noel has over six years of experience supporting clients in the funding, accounting disclosures, administration, and regulatory compliance of their retirement plans, as well as the design of both qualified and nonqualified retirement plans. He is a Total Retirement Management transition consultant. Total Retirement Management is Wells Fargo s defined benefit pension plan administration outsourcing service. Noel graduated, cum laude, from Vanderbilt University with a Bachelor of Arts in Mathematics and Economics. Noel is a Fellow of the Society of Actuaries, an Enrolled Actuary, a Chartered Enterprise Risk Analyst, and a Member of the American Academy of Actuaries. Noel is a consulting actuary in our Nashville, TN office. Bryan, Pendleton, Swats & McAllister, LLC edevelopments RECENT DEVELOPMENTS IN EMPLOYEE BENEFITS Go Green! The BPS&M enewsletter contains the same articles and content as the printed Developments as well as links to past articles, surveys, and other BPS&M publications. Subscribe now by ing [email protected] The BPS&M Pension Liability Index Updated as of November 30, 2015 by Jeffrey Thornton, ASA, EA, MAAA Interest rates are arguably the primary driver of the volatility in pension plan liabilities. BPS&M has established a set of liabilities and applied the yield curves to those liabilities in order to create the indices used to demonstrate the effect of interest rates on plan liabilities. The BPS&M Pension Liability Index tracks the percentage change in liabilities for a typical defined benefit plan under the following four interest rate standards, which are in general use: 1. The Full Yield Curve published by the IRS for minimum funding purposes under IRS Code The 24-month Averaged Yield Curve published by the IRS for minimum funding purposes under IRS Code The Adjusted Average Yield Curve reflects the impact of the Moving Ahead for Progress in the 21st Century Act (MAP-21), the Highway and Transportation Funding Act of 2014 (HATFA), and the Bipartisan Budget Act of 2015 (BBA 2015). HATFA and BBA 2015 extended the funding relief, which was introduced by MAP-21 in Originally, under MAP-21, the funding relief began to diminish in 2013, but has been extended under BBA 2015, such that it 10 Bryan, Pendleton, Swats & McAllister / November-December 2015

11 does not now begin to diminish until For more information about BBA 2015, see the article titled Bipartisan Budget Act of 2015 Includes Pension and Healthcare Changes in this issue of Developments. 4. A Corporate Financial Yield Curve used for financial statement pension liability determinations. Prior to January 1, 2014, this was measured using the Citigroup Pension Discount Curve. It is now measured using the Wells Fargo Pension Discount Curve (AArated or higher). For more information about the Wells Fargo Pension Discount Curve, please read the article titled Introducing the Wells Fargo Pension Discount Curves in the Jan/Feb 2014 issue of Developments. The BPS&M Pension Liability Index uses a hypothetical plan for benchmarking purposes based on typical pension plan features. The duration of the liabilities under this hypothetical plan is 15 years. The benchmark period for the Index starts with the effective date of the Pension Protection Act (January 2008), and the graph shows the rise and fall in liabilities due to changes in interest rates relative to that date. All other factors remain constant throughout the benchmarking period; ergo, the change in liabilities is due solely to the interest rate environment. The trends demonstrated in the graph will generally hold true for most pension plans, but the magnitude of the percentage changes will vary depending on a given plan s demographics and benefit accrual patterns. Indices Changes Indices Since Inception (1/1/08) The Indices Changes table shows the percentage changes in the indices over various periods Year to Date The BPS&M Pension Liability Index is updated regularly. If you have questions or comments concerning the Last 12 months Full Yield Curve +29.3% -5.8% -3.7% Averaged Yield Curve Adjusted Average Yield Curve Corporate Financial Yield Curve +29.0% +2.5% +2.5% -3.6% 0.0% +2.7% +35.8% -3.7% -2.4% BPS&M Pension Liability Index, please contact your BPS&M consultant or [email protected]. Jeffrey Thornton, ASA, EA, MAAA Jeff has 10 years of actuarial experience in defined benefit plan administration. He specializes in liability studies and has provided plan-specific analyses for clients of various sizes and diverse industries. Jeff is a consulting actuary in our Louisville, KY office. BPS&M Pension Liability Index since inception % 129.3% 129.0% % Jan 09-Jan 10-Jan 11-Jan 12-Jan 13-Jan 14-Jan 15-Jan 15-Nov Corporate Financial Yield Curve Full Yield Curve Average Yield Curve Adjusted Average Yield Curve (HATFA) Bryan, Pendleton, Swats & McAllister / November-December

12 5301 Virginia Way, Suite 400 Brentwood, Tennessee Subscribe to edevelopments, our enewsletter. Same articles, faster delivery! us at Developments RECENT DEVELOPMENTS IN EMPLOYEE BENEFITS About BPS&M Bryan, Pendleton, Swats & McAllister, LLC has been providing actuarial and benefit consulting services to clients since Jackson Suite 266 Highland Village, 4500 I 55 N, Jackson, Mississippi 39211, Louisville Brinley Avenue, Suite 101, Louisville, Kentucky 40243, Nashville 5301 Virginia Way, Suite 400, Brentwood, Tennessee 37027, Richmond 9020 Stony Point Parkway, Suite 200, Richmond, Virginia 23235, Contact us via at [email protected] Developments is furnished by Bryan, Pendleton, Swats & McAllister, LLC (BPS&M), a Wells Fargo Company, to provide general information about recent developments and current topics in employee benefits. The information provided is a summary and should not be relied upon in lieu of the full text of a particular law, regulation, notice, opinion, legislative proposal or other pertinent information, and the advice of your legal counsel. BPS&M does not practice law or accounting, and this publication is not legal or tax advice. Legal issues concerning your employee benefit plans should be discussed with your legal counsel. This publication is intended for informational purposes only and is in no way intended to offer investment advice or investment recommendations. Copyright 2015 Bryan, Pendleton, Swats & McAllister, LLC (BPS&M) All rights reserved

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