Compliance May 7, 2003

Actuary Group: Different Mortality Tables Valid for Pension Calcs

May 7, 2003 (PLANSPONSOR.com) - While the potential for blue-collar pension disparity grabbed headlines earlier this week, there appears to be a legitimate case to be made for distinguishing between different worker groups, according to an industry actuary group.
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>In fact, according to Ron Gebhardtsbauer, senior pension fellow with the American Academy of Pension Actuaries, research confirms the notion that different levels of pension funding can be appropriate for different employee groups, including blue versus white collar – and that can be a valid way for lawmakers to proceed in pension reform efforts. The Academy conducted the research along with the Society of Actuaries.

>A New York Times story earlier this week quoted an actuary critic as saying that the provision in the latest pension reform bill from Representatives Rob Portman (R-Ohio) and Benjamin Cardin (D-Maryland) didn’t adequately differentiate the potential mortality of white-collar employees. (See  Actuary Finds Fault with Portman-Cardin Pension Provision).  If the mortality table flexibility survives in the Portman-Cardin bill as it wends it way through Congress, it could potentially save employers with blue-collar workers billions of dollars in pension costs.

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>Regardless of questions raised about the Portman-Cardin bill, however, Gebhardtsbauer told PLANSPONSOR.com that the Academy believes:

  • that a mortality table drawing a difference between white and blue-collar workers is an “actuarially sound and preferable” way to figure out how much employers should have to put into their pension plans
  • that the blue/white collar distinction is a better way to differentiate workers than income level; some critics (including Edwin Hustead, the source for the NYT article) contend that how much a person makes has more to do with their mortality than their type of job
  • that well-paid unionized employees (such as pilots or professional football players) should not be lumped into the blue-collar category.

>Gebhardtsbauer told PLANSPONSOR.com that the Academy has contacted Representatives Portman and Cardin with an offer to help lawmakers use the Academy’s research to effectively hash out the underlying pension policy issues. “I think those (Academy research) numbers can used to justify different mortality tables for blue collar groups compared to white collar groups,” Gebhardtsbauer said. “We’d love to help (lawmakers).”

Compliance May 6, 2003

Final Comparability Regs Published

June 29, 2001 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) has issued final regulations (TD 8954) that allow defined contribution and combined defined contribution/defined benefit retirement plans to satisfy nondiscrimination requirements based on plan benefits, rather than contributions.
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The final regulations kept the elements of proposed regulations on cross-testing, or so-called new comparability, plans issued on October 5, 2000.

These programs are designed to provide higher profit-sharing rates to highly paid employees. New comparability plans are cross-tested on a projected-benefits basis to meet nondiscrimination rules.

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Current rules allow employer contributions to be tested on either a present-value basis or cross-tested on a future-value basis that involves projecting benefits that would be payable at retirement. Cross-testing lets a defined contribution plan be tested like a defined benefit plan, essentially focusing not on the current rate of contribution, but on what a particular contribution for a given employee is projected to be – with interest – as an annual benefit paid when the employee reaches age 65.

The primary addition in the final regulations is a limit on the minimum allocation rate that combined plans are required to provide to nonhighly compensated employees under one cross-testing requirement.

Combined Plans Cap

According to BNA, the proposed regulations allowed combined plans to satisfy cross-testing requirements if they are:

  • primarily defined benefit in character
  • consist of broadly available separate plans, or
  • pass a minimum allocation gateway

That gateway occurs when:

  • each nonhighly compensated employee in the plan has an allocation rate that is at least one-third of the allocation rate of the highly compensated employee with the highest allocation rate (if the highest rate is less than 15%, percent)
  • the allocation rate for all nonhighly compensated employees is least 5% (if the highly compensated employee rate is between 15% – 25%) or
  • the allocation for each nonhighly compensated employee is least 5% plus 1 percentage point for each 5 percentage point increment (or portion thereof) by which the highly compensated employees rate exceeds 25%

The final regulations said the allocation rate that combined plans are required to provide for non-highly compensated employees need not exceed 7 1/2% of pay. The imposition of such a limit was recommended as necessary in order to avoid leading to the abandonment of defined contribution plans by employers.

Proposed Rules Expanded

The proposed regulations allowed defined contribution plans to satisfy cross-testing requirements if the plans provided broadly available allocation rates, age-based allocations, or an allocation rate for nonhighly compensated employees that is at least 5 percent of compensation or one-third the highest allocation rate for highly compensated employees–referred to as the minimum allocation gateway.

The proposed regulations also said a defined contribution plan that makes each allocation rate available to a group of employees that satisfies tax code Section 410(b), without regard to the average benefit percentage test, would be treated as having broadly available allocation rates and could use nondiscrimination testing.

The final regulations retain these requirements, and additionally permit two allocation rates to be aggregated such that nonhighly compensated employees with a higher allocation rate can be used to support a lower allocation rate.

The final regulations also allow uniform target benefit plans that do not comply with the safe harbor testing method under Treasury Regulations Section 1.401(a)(4)-8(b)(3) to satisfy the age-based allocations requirement.

In addition, the final regulations broaden the age-based allocations requirement to accommodate plans that achieve a smoother progression into higher rates based on the sum of age and years of service.

The Final Regulations

For MORE on comparability plans, see our PLAN DESIGN Solutions topic .

See Also The New Comparability Formula . 

And New Take on Comparability

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