TIA’s EA Exam 2A Blog

I just got the email from ASPPA with the conference brochure. This meeting will be in Atlanta, GA on January 15-16, 2009:
http://www.asppa.org/archive/conf/2009/2009bcos.htm

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!

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.

PRACTICAL NOTE

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.

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.

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.

Several students have asked me about possible differences between the 2007 and 2008 exam. I don’t really anticipate any significant difference in content of the exam, or the difficulty level. The 2008 exam would be much harder if the proposed regulations were on the syllabus - but that has never happened.

Just be sure you pass this exam before 2010. That will be the first year that
1. The final regulations will be on the syllabus, and
2. The question writers will have enough time to study the regulations to start getting into the finer details

I’ll be mailing out CDs on 07/30/08 to the students who signed up for the online seminar. I am finalizing printing of materials for everyone else. I will start shipping those out on 07/31/08.

You’ll need to buy a BIG binder. This year clocks in at 2004 pages!!

Several students have sent messages asking if the online seminar has the right overheads. The short answer is Yes.

The long answer is that 99% of the overheads have not changed since last year. I have re-recorded several pages, but the presentations have not been re-constructed yet.

During the seminars, I found more minor errors in the online solutions. Since these are fairly minor, I do not plan on re-recording the solutions:

• CM-64p    2004-13    Smith’s retirement benefit should be calculated as 30(600) = 18,000
• CM-74p   2002-36     16,200 incorrectly shown as 15,200
• CM-80p   2003-44     Past service of 18 years incorrectly shown as 15
• ME-70p   2004-21      ARA of 5,000 incorrectly shown as zero

Section J.2.1

The solution for IRC 430 Minimum Funding practice problem 3 has been re-recorded to reflect the correct handling of the shortfall base and waiver base amortizations. This matches the revised solution I made available on 09/12/07.

Sections P.1.1 and P.1.2

I revised the discussion for IRC 415 overhead pages11-28B and page 36. These now match the revised overheads I made available on 09/11/07.

Sections P.2.1.a,  P.2.1.b, and P.2.1.c

The solutions for 415 problems 2004-25, 2004-37 and 2005-36 were incorrect. I have recorded the corrected versions. I made the typewritten solutions for 2004-25 and 2004-37 available on 10/03/07.

During the live seminars, I discovered errors in some exam problem solutions. Most of these are pretty minor. In the interest of saving time (to create NEW problems), I do NOT plan on re-recording the solutions.

It looks like I had a mental block on the 404 UCL calculation! Here is a summary list:

• Page SE-40 example: get lower minimum by eliminating both CB and PB so the funding surplus is zero
• Page ME-22p, problem 2003-41:  final answer is wrong - should subtract MFSA credits, which gives 196,151
• Page ME-70 example: 404 UCL calculation should be 181,440 instead of 90,720
• Page ME-70p problems with incorrect 404 UCL calculation
  • 2003-30 should be 148,100 instead of 126,700
  • 2004-21 should be 797,000 instead of 326,200
• Page ME-94p problems with incorrect 404 UCL calculation
  • 2003-45 should be 195,200 instead of 114,800
  • 2004-24 should be 264,000 instead of zero