10/17/2016. BOY vs. EOY Valuation Dates. Norman Levinrad & Sheri Alsguth

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1 BOY vs. EOY Valuation Dates Norman Levinrad & Sheri Alsguth 2 1

2 Coordination of data, val and testing You get data for a plan year, you run a val, and you do testing. EOY: data as of 12/31/16; val for 2016 as of 12/31/16; testing done for 2016 BOY: data as of 12/31/16; val for 2017 as of 1/1/17; testing done for Everything starts when you get the data. There is no difference in timing of the work. The benefits of hindsight Of all the words of mice and men, the saddest are it might have been. - Kurt Vonnegut It is always possible to look back after the fact and say a situation would have been better handled with a BOY or EOY val. Every example created to prove one method is better than the other has a corollary that supports a different conclusion. 2

3 How do we do the analysis? For Summit, the main questions are: What method is generally better for the DB sponsor in terms of meeting their business objectives? What is better for Summit to allow us to meet our personal objective which is to minimize our stress? How do we best spread our work over the year? How do we do the analysis? For Pinnacle, two main questions are: What is the benefit you are funding for and is it the benefit actually being accrued; in cash balance/other accumulation plans particularly this can be important Particularly when doing combined plan testing am I running multiple valuations at year-end 3

4 Advantages of BOY Valuation Date Based on prior year compensation and asset information huge advantage with sole props and partnerships. More on this later. Contribution range for upcoming year can be calculated sooner a year sooner. Provides the business owner a long lead time and avoids surprises with no time to plan. Allows time to freeze accruals or reduce contribution requirement. Avoids the need for an < year end estimate. 7 Advantages of BOY Valuation Date You have the choice whether or not to reflect an amendment adopted in a plan year via a 412d2 election gives some flexibility depending on sponsor s objectives. 4

5 Advantages of EOY Valuation Date Use actual hours reflected which impacts the TNC Use actual compensation to be reflected which can impact the TNC (BOY val uses expected comp) What a novel concept use real data 9 Advantages of EOY Valuation Date With BOY val can have MRC in term year that can require deposit causing assets > 415 limit due to run up in assets between BOY and term date 10 5

6 Advantages of EOY Valuation Date Entrants not employed at BOY can be included in cost can be issue where prior service granted or short participation requirement Due to cushion more of a 1 st year issue only Participants not accruing a benefit during the year (e.g. decreased hours or terminated) not included in cost 11 Advantages of EOY Valuation Date Example One participant cash balance plan Allocation Formula = 50% of compensation 2015 Compensation = $245, Compensation = $150,

7 Advantages of EOY Valuation Date Example (cont.) No excess assets, plan expenses or shortfall If 12/31/2016 Valuation, MRC will be close to the accruals If 1/1/2016 Valuation, MRC will be significantly larger than the accruals and could result in a larger MRC than client can afford (Levinrad says not necessarily discuss assumption for expected comp). 13 Advantages of EOY Valuation Date Sole Proprietor issues are in some cases better handled with EOY valuation when net Sch C income drops (not the fact when hi 3 AMC is established) AFTAP s are done when the SB is done, you don t need another val run to generate the AFTAP. 14 7

8 Sole Proprietor Issues EOY val is challenging because of the circular compensation calculation if benefits are salary related.you can t quote a range, and you can t do testing unless you know the specific contribution. (Levinrad says) Sole Proprietor Issues Nonsense; of course you can quote a range. You do val 1 presuming they will deposit the minimum (benefit will be at highest level) You do val 2 presuming they deposit the maximum (benefit will be lowest) Depositing more than val 1 but less than val 2 will result in benefit that will clearly lead to a range that deposit will fall within Can be done in a spreadsheet in 20 minutes! 8

9 First Year Contributions Effective date of company 1/1/2013 Effective date of plan 1/1/2015 W-2 for Sole Owner/Employee $30, $40, $200,000 What salary is used for BOY valuation 1/1/15? 17 Plan Terminations 1/1/16 BOY valuation finished 4/1/2016 Plan frozen and terminated 5/31/2016 No benefits accrued during 2016 Can plan valuation be amended for 2016? Yes, need a 412d2 election. Does it have to be amended? No it does not, there is the option. Much easier to know the final year contribution if BOY val. Just hope it doesn t cause excess assets! 18 9

10 Plan Terminations Guidance says: Can use any val date in period from BOY to plan termination date if plan term date is prior to regular val date. Example: EOY val, plan terminates 5/31/16. You can: Use a 5/31/16 val date Or change to a 1/1/16 val and recognize freeze or not. Or any date in between. Need employer election to change? 19 To PFB or not? What creating PFBs requires. To add to a Prefunding Balance as of January 1, the sponsor must provide a written election to the plan s actuary no later than September 15 of that year. The election must include the specific dollar amount to be added to the Prefunding Balance. To use a Prefunding Balance toward minimum funding requirements for the current plan year, the Funded Ratio Percentage in the prior plan year must be at least 80% and the sponsor must provide a written election to the plan s actuary no later than September 15 of the following year, including the specific amount to be applied. Standing elections? 10

11 PFBs The value of the plan s assets are generally reduced by any Prefunding Balances for purposes of the AFTAP. Because Prefunding Balances reduce the AFTAP, a sponsor may decide to voluntarily waive all or a portion of the balances. In order for a plan sponsor to waive a Balance as of January 1, the sponsor must provide a written election to the plan s actuary no later than December 31 of that year. The election must include the specific dollar amount to be waived. Deemed waivers to avoid restrictions. This requires a great deal of AFTAP tracking. Who pays for this? What is gained by creating PFB s At best a small reduction in the required contribution. How do you explain the decision to create PFBs or not to your clients? Who decides? 11

12 Using PFB in Plan Term situation CB plan EOY val 12/31/2015 Plan term 2/29/2016; flip to BOY and recognize amendment in val No income in 2016 deduction not wanted in 2016 Plan underfunded majority owner waiver MRC for 2015 $12,000 Contribution for 2015 $25,000 that s it Using PFB in Plan Term situation, cont. Easy to run 1/1/2016 val to determine the amortization base and MIN Make PFB election of $12,000 it is enough to result in the MRC for 2016 being covered by the PFB Reduces assets but we amortize shortfall (factor ~ 6) so it works out Standing Election already in place to use PFB Plan at least 80% so we can use PFB 12

13 Should a cash-rich entity always maximize its DB plan contribution each year? Isn t this a tax question? Is it our job to make that determination? Reversion risk? Questions? norman@summitbenefit.com salsguth@pinnacle-plan.com 26 13

1/8/2016. Compensation Concerns for Sole Props and Partnerships. The different types of Business Entities

1/8/2016. Compensation Concerns for Sole Props and Partnerships. The different types of Business Entities Compensation Concerns for Sole Props and Partnerships Norman Levinrad, EA, FSPA, MAAA Summit Benefit & Actuarial Services, Inc. The different types of Business Entities C Corporations S Corporations Partnerships