Defined Benefit Plan Actuary Explained: Rules + Why You Need One [Video] ✅


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If you set up a defined benefit plan, you must have an actuary. But don’t worry. The majority of third-party administrators will have one for you or provide this service. So it’s something you’ll be able to look for on your own.

With a defined benefit plan, the actuary is a specialist that must have education and certification to sign off on your funding level.

What is a defined benefit plan actuary, and what do they actually do? This article will discuss what an actuary actually does and dive into specific details of how they perform their work. Let’s get started.

What is a defined benefit plant actuary?

Actuaries are people certified to perform analysis using statistics and mathematics to manage risk. They are often seen in the insurance field, looking at long-range project projections to desert Turman insurance risks.

For example, insurance actuaries will look at Insurance tables and project out into the future. The goal is to determine appropriate insurance rates and reserves for insurance companies.

Actuaries will use future expectations, historical data, and statistics to determine reasonable insurance premiums. Without an actuary, insurance companies would be unable to set insurance premiums properly, and Payouts for death benefits could exceed any insurance reserves.

In summary, actuaries manage, measure, and analyze risk to help insurance companies make better decisions.

So how does this tie into defined benefit plans?

To understand what an actuary does with a defined benefit plan, we need to analyze what a defined benefit plan is.

A defined benefit plan is a pension structure in which a company promises to pay eligible employees a specified amount at retirement. The ultimate benefit is primarily driven by compensation and employee tenure.

For example, a company could provide specific employees a retirement benefit of 3% of their salary for every year they are employed with the company. In this situation, if an employee works for 20 years for the company and earns $100,000 annually, they will receive an annual pension of $30,000 a year for life. Here is how it is calculated:

Many find benefit plans, including cash balance plans, allow this final payment stream to be paid out, as a specific, some at retirement rather than an annuity stream.

RoleResponsibilities
Monitor Plan ComplianceDetermine Funding Range
Communicate with TPA & CompanyCertify Schedule SB
Oversee Plan DesignFile Form 5500
Coordinate AmendmentsAnalyze Accrued Benefit

Many business owners will use a cash balance plan, which is a type of defined benefit plan. Rather than providing simply a lifetime payment stream at retirement, a cash balance plan can credit the participant or employee with an annual amount that will grow over time at a specified interest rate. Once the employee leaves the company or retires, the employee can receive a lump sum that equals the pay credits they earned during their employment.

For example, let’s assume that a cash balance plan provides a yearly pay credit of $5000 at the end of the year if the plan assumes an interest crediting rate of 5% a year.

As a result, the employee would receive a credit of $5000 at the end of year one. This would increase to $5250 at the end of year two.

However, the employee in year two would get another paid credit of $5000. So the ending balance at the end of year two is the total of these two amounts. Take a look at the calculation below.

It’s important to consider that the actuary will keep track of the cash balance calculation and perform annual certification of funding amounts. Unlike a defined contribution plan, there are no separate individual investment accounts. The company will fund the funds in one large pool account. It is the actuary’s job to track the components of each employee.

Upon retirement, an employee would elect to take the lump sum distribution of their account balance, as determined by the actuary, or take the payment stream Over their remaining life. The company would use the pooled assets to pay out any retirement benefits.

What is the actual responsibility of the actuary?

The actuary will estimate the value of employer obligations and sign off on final funding. This is based on benefits provided and other items documented in the plan document.

The actuary must calculate any liabilities and utilize a variety of criteria, including expected compensation increases, retirement rates, investment returns, disability, death and a variety of other assumptions. The actuary will use this historical data and expectations to make assumptions about the employee mix and funding.

Not only does the actuary need to value the employer’s obligations, but they must calculate the required contribution and certify this amount to the IRS. The contribution is typically not a fixed amount but rather a funding range. This will allow the company flexibility when deciding the final funding for a given year.

When establishing a defined benefit plan, the actuary Will specify how the benefit calculation works in the plan document itself. They will consider employee demographics, such as contributions required to meet the company objectives.

Defined benefit plan actuaries also will help the company with IRS laws, rules, and regulations regarding pension administration. This includes Certifying the minimum contributions and the overall plan funding status. Compliance will also entail required government and IRS filings along with participant notices.

As a general rule, defined benefit plan actuaries will be licensed and have enrolled actuary designation. This allows the actuary to certify figures relating to defined benefit plans and cash balance plans.

What qualifications does an actuary have?

Becoming certified as an enrolled actuary requires sufficient education and experience. The requirements are as follows:

Formal education. A bachelor’s degree must be obtained with the primary area of focus as actuarial mathematics, or simply an equivalent, ours, studying statistics, mathematics, or actuarial science.

The candidate must complete a series of exams that demonstrates their knowledge in the pension area. This is typically the most challenging requirement for people working towards the enrolled actuary certification. The test requires many hours of studying and can be difficult. In many situations, we see pension practitioners with extensive experience who need help to pass exam basics.

The actuary must also have a minimum of 36 months of actuarial pension experience or 60 months of actuarial experience with 18 months of responsible pension knowledge.

Every three years, the actuary must complete 36 hours of continuing education within the actuary space.

The enrolled actuary must also adhere to strict standards covering work performed, care, conflicts of interest, and professional responsibility. This is similar to the ethics requirements for certified public accountants or CPAs.

Based on the above, you can see that becoming an enrolled actuary is very challenging and requires rigorous testing. It is simply not something the average person will be able to obtain.

What else does an actuary have to do?

An actuary will often obtain credentials in addition to the enrolled actuary designation. There are several professional distinctions that an actuary can receive. These will come from being an associate of the society of actuaries, or ASA, and the Fellow of Societies of Actuaries, or an FSA. These societies will have different criteria that will provide a breadth of knowledge for the actuary.

An associate credential is typically obtained first and demonstrates confidence over and above the enrolled actuary designation. It requires the actuary to complete several more examinations to show a deeper understanding of actuarial Rules and principles.

In addition, if an actuary wants to continue obtaining the highest designation from the society of actuaries, they can work towards a fellowship. Obtaining a fellowship requires more rigorous exams and further demonstration of pension experience and competence.

Professional CertificationsFunding Range
IRS Enrolled ActuaryTarget Plan Contributions
Formal EducationCertify Minimum Contribution
5 Years of Actuarial ExperienceCalculate Maximum Range
Fellow of Societies of ActuariesCertify IRS Compliance

Both the fellowship and associate designations require substantial additional pension knowledge. For example, when becoming a Fellow of the Society of Actuaries, the individual must not only demonstrate knowledge of pension plans and authoritative guidelines, like ERISA and the internal revenue code, but must pass examinations about pension obligations, financial reporting, and risk management. This is in addition to basic economics, finance, and utilizing investments in statistical models. To the tip chain of these examinations, the actuary typically must study for thousands of hours.

The fellowship and associate designations will require the actuary to Comply with other ethical behavior and requirements. They were also required to have increased continuing education over and above the enrolled actuary requirements.

How to Find a Defined Benefit Plan Actuary

Here are the 5 steps to locating a qualified actuary:

  1. Ensure the Actuary has Experience with Your Plan Design

    Actuaries have experience in many different fields and have various specialties. You need to find an actuary that has experience with a variety of plan designs. Some actuaries only have experience with cash balance plans. But some will have experience with both cash balance and traditional defined benefit plan structures. Ensure that you select an actuary that can provide you with a custom plan design along with a formal illustration.

  2. Determine Education Level

    Actuaries must have the enrolled actuary distinction and typically have add’l credentials. These credentials are usually being a member of the Society of Actuaries (ASA) or a Fellow of Societies of Actuaries (FSA). These societies have separate criteria and will help the actuary specialize in specific areas. But don’t let the certifications overshadow the experience. We have seen many actuaries that have limited experience and don’t understand the complexity of plan design.

  3. Verify Schedule SB

    An actuary will certify the Schedule SB. By signing and approving the SB, the actuary certifies to the IRS that the Schedule is complete and accurate. They also attest that the actuarial assumptions utilized are appropriate and reasonable under the plan provisions and employee demographics. If the actuary did not follow specific laws or regulations, they must indicate that and provide additional information.

  4. Coordination with TPA

    Many business owners are surprised to know that many administrators (often called “TPAs”) do not have an in-house actuary. The service is often subcontracted out to other off-site actuaries. This way the TPA can select an actuary that will provide a unique and specialized design for the client. The TPA will often be responsible for the Form 5500, but may actuary coordinate the filing with the plan actuary.

  5. Coordinate with CPA and Financial Planner

    Your CPA will be the one that takes the tax deduction on the tax return. As such, it is critical that your actuary and TPA will coordinate the filing with the CPA. In addition, the investment returns will tie into the funding range. Making sure you have a financial planner that understands the plan design and how the plans operate is critical.

Do I need to have a defined benefit plan actuary?

In virtually all cases, you’ll need an enrolled actuary to set up, maintain, and provide annual actuarial funding numbers to have a cash balance plan defined benefit plan. If you need someone with expertise in financial reporting or risk management, consider hiring a fellow of the society of actuaries.

When deciding on the proper defined benefit plan actuary, you should consider the following:

Defined benefit plans are very complex. Ensure that your actuary understands your plan, goals, and requirements to meet your objectives and funding levels.

The actuary should be able to listen to you regarding your plan structure and ask the appropriate questions to understand the plan objectives. Once you’re under your actuary understands what you’re looking to achieve, they need to make sure they have the experience to implement the plan design.

The actuary should also have excellent communication skills. These are technical topics, and the actuary should be able to give you the correct information to allow you to make informed gift decisions without providing unnecessary details.

Paul Sundin

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