Tag Archives: Mike Peatrowsky

Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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Nondiscrimination testing: Minimum allocation gateway

Peatrowsky-MikeA defined contribution (DC) plan can test on a benefits basis if it meets any of the following criteria:

• Provides broadly available allocation rates
• Provides age-based allocations
• Provides a minimum allocation gateway to non-highly compensated employees (NHCE)

A plan satisfies the minimum allocation gateway test if each NHCE has an allocation rate, which is determined using Internal Revenue Code (IRC) Section 414(s) compensation, that is at least one-third of the highest allocation rate of any highly compensated employee (HCE) participating in the plan.

Alternatively, a plan is deemed to satisfy the gateway test if each NHCE receives an allocation of at least 5% of the employee’s IRC Section 415 compensation. Therefore, a DC plan designed to provide a minimum allocation of at least 5% to NHCEs will always be eligible to be cross-tested for nondiscrimination testing.

Aggregated DB/DC plans
To satisfy the minimum gateway for an aggregated defined benefit (DB)/DC plan, each NHCE must have an aggregate normal allocation rate (ANAR) that meets the following requirements:

Nondiscrimination testing graph

Instead of using each NHCE’s equivalent allocation rate under a DB plan in calculating the aggregate allocation rate, it is permissible to use the average of the equivalent allocation rates of all NHCEs benefiting under the DB plan.

Who must receive the minimum allocation gateway?
Employees who receive a safe harbor nonelective contribution, a top-heavy minimum contribution, or a qualified nonelective contribution (QNEC) must receive a minimum allocation gateway contribution, unless they are separately tested under 401(a) as part of a disaggregated group.

If you have questions regarding the minimum allocation gateway, please contact your Milliman consultant.

PBGC variable premiums: Standard vs. alternative premium funding target

Peatrowsky-MikeAs part of the Pension Protection Act of 2006 (PPA), plan sponsors have two options for calculating their “unfunded vested benefits” (UVB) to determine the variable premium owed to the Pension Benefit Guaranty Corporation (PBGC) each year. The amount by which the vested liability, called the funding target, exceeds the fair market value of plan assets determines the plan’s unfunded vested benefits. The required variable premium for 2014 is $14 per $1,000 of UVB.

The plan’s UVB is determined under one of two different methods: The standard premium funding target or the alternative premium funding target.

So what’s the difference?
The only difference in the two methods is the discount rate used. All other assumptions (mortality, turnover, etc.) are the same for both calculations. However, the discount rate plays a vital role in determining the plan’s funding target.

The standard premium funding target is the default method. The discount rate used for the calculation of the standard method is based on spot rates for the month prior to the plan year (i.e., a one month of average of such rates).

The alternative premium funding target is the other method. The calculation of the alternative method is based on the rates used to calculate a plan’s funding target for the premium payment year, before reflecting Moving Ahead for Progress in the 21st Century Act (MAP-21) stabilization rules. Typically, the discount rates used for the purpose are a 24-month average of the current spot rates.

When a plan sponsor elects to switch from one method to the other, they are locked into that election for five years.

Why is this important for 2014?
In a declining interest rate environment, as we experienced from the end of 2008 through the beginning of 2013, the trailing 24-month average produces higher interest rates than current monthly spot rates. Higher discount rates produce a smaller plan liability for PBGC purposes, resulting in smaller variable premiums. Many plan sponsors who had underfunded plans in 2009 elected to move to the alternative method. Over the past 12 months, we are in an increasing interest rate environment, making current monthly spot rates higher than a 24-month average.

So the question becomes: is 2014 the year to switch back to the standard method? Depending on funding status of the plan, it could decrease variable premiums by a significant amount. With the passage of the budget accord, as stated in Tim Herman’s blog, the amount of variable premiums is expected to increase significantly over the next few years. If the plan sponsor believes interest rates will continue to rise or stay flat over the next couple years, it may be time to make the switch. The flip side is that, if you switch and interest rates decline, you could be required to pay higher PBGC premiums and would be locked into this method for five years.

Is a cash balance plan right for my business?

Peatrowsky-MikeEmployers and owners continually look at different strategies to defer tax on income, provide benefits to key employees, and boost their retirement savings. As Bart Pushaw noted in a recent blog post, cash balance plans have the potential to provide for solid retirement security and shelter greater income from taxation to increase retirement wealth. The big question for employers remains how to know if adding a cash balance plan is right for them.

Advantages of a cash balance plan for employers:

• They offer the potential for larger tax-deferred contributions than permitted under current defined contribution (DC) limits for owners or key employees.
• Tiered benefit levels are attractive to partnerships and professional services.
• Account balances are easy to understand for participants when compared to traditional defined benefit (DB) plans.
• Cash balance plans are generally less volatile and less expensive than traditional DB plans.
• They can provide greater funding flexibility than DC plans.

Disadvantages of a cash balance plan for employers:

• They require actuarial services to determine funding levels.
• Plan funding levels may restrict lump sum payments.
• Typically, the employer bears the investment risk.
• Cash balance plans require Pension Benefit Guaranty Corporation (PBGC) premiums.
• Typically, plans are individually designed so plan documents are more expensive than prototype documents.

Candidates for a cash balance plan:

• Employers that want contributions in excess of the limits allowed under DC plans for owners, partners, or key employees
• Employers that have the resources to make the required contributions
• Employers that generally are not affected by economic volatility
• Employers with older key employees and younger staff
• Employers who have a generous 401(k)/profit sharing plan for staff

If you are an employer who fits the candidate criteria above, and believe that the advantages of a cash balance plan may outweigh the disadvantages, then now might be the right time to investigate further.

PBGC premiums: Reading the MAP-21 fine print

Peatrowsky-MikeIn 2012, Congress passed the Moving Ahead for Progress in the 21st Century Act (MAP-21), which allowed plan sponsors of defined benefit (DB) plans to use higher interest rates in determining the minimum funding requirements. MAP-21 gave many plan sponsors much needed relief from escalating pension contributions that have been due to declining interest rates. However, as with most good deals, it is always essential to read the proverbial “fine print.”

The MAP-21 “fine print” comes in the form of premium increases for Pension Benefit Guaranty Corporation (PBGC) insurance. PBGC premiums come in two parts:

1. Flat rate premium
2. Variable rate premium

For single employers, the flat rate premium is a flat dollar-per-participant charge. As part of MAP-21, the premium increases from $35 in 2012, to $42 in 2013, to $49 in 2014. MAP-21 also calls for future flat-rate premiums to be adjusted for inflation.

The variable rate premium is based on the amount of unfunded vested benefits (UVB). The UVB is the excess, if any, of the premium funding target over the fair market value of plan assets. In 2013, employers must pay $9 for every $1,000 of UVB. In 2014, the premium will increase to $13 (adjusted for inflation) per $1,000 of UVB, and in 2015 to $18 (adjusted for inflation) per $1,000 of UVB. The variable rate premium will have a per-participant cap of $400 beginning in 2013 and will be adjusted for inflation beginning in 2014.

However, the calculation of the premium funding target is unaffected by the higher MAP-21 interest rates. Therefore, the premium funding target will be significantly higher than the plan’s liability for purposes of minimum funding.

For multiemployer plans, the flat-rate premium increases from $9 in 2012 to $12 in 2013. MAP-21 also calls for future flat-rate premiums to be adjusted for inflation. Multiemployer plans are not subject to the variable premium.

With the 2013 filing deadline of October 15, 2013, approaching for mid-size and large calendar-year plans, employers may be in for a shock if they haven’t read the “fine print.”

Will your retirement savings be capped?

As part of the proposed federal fiscal year 2014 budget, President Obama included a cap on the amount of retirement savings an individual could accumulate in tax-deferred retirement plans. The total accumulation amount for an individual includes all qualified tax-deferred savings plans such as traditional defined benefit (DB), cash balance, money purchase, profit sharing, 401(k), and 403(b) plans, as well as funded governmental 457(b) arrangements and Individual Retirement Accounts (IRAs), both traditional and Roth.

The proposal is most likely a result of the presidential campaign last year, during which it was reported that Governor Mitt Romney had qualified accounts in excess of $100 million. However, the administration’s budget proposal would not tax accumulated accounts in excess of the cap. If the accumulated accounts exceed the cap, the individual would not be allowed to make future deferrals or receive any future employer contributions under any retirement plan.

The proposal would essentially cap tax-advantaged retirement plans to an amount necessary to provide the maximum annuity permitted under a defined benefit plan. The current limit is $205,000 payable annually at age 62. The annual annuity amount would be increased by a cost of living adjustment.

After converting the annuity to a present value using current interest rates, the total accumulation amount is approximately $3.0 million to $3.4 million. Because of the current low interest rate environment, that total accumulation amount is inflated. If interest rates return to a historical level, the maximum accumulated amount could be as low as $2.2 million to $2.4 million for an individual age 62.

No real details are available on how account values would be reported or how the cap would be calculated. There is a concern small business owners could eliminate their retirement plans if they were at the accumulated cap, because they would not receive the benefit of tax-deferred treatment. As a result, retirement savings vehicles for many rank and file employees could be eliminated. As an alternative, consideration could be taken to limit only employee deferrals under the proposal or a portion of employer-provided contributions, allowing small business owners some incentive to keep their retirement plans.

Under the proposal, it is estimated that the accumulation cap would result in approximately $9 billion in additional federal tax revenue over the next 10 years beginning October 1, 2013. On the flip side, it has not been determined how much tax revenue would be lost in future years as a result of smaller account balances for these taxpayers. All distributions from qualified retirement plans (other than Roth accounts) are taxed at distribution.

It will be interesting to see if this proposal will gain traction with lawmakers.