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Schedule SB and Return of Contributions

Preparing the Schedule SB is typically a basic task that pension actuaries must complete. However, while preparing the 2016 SB for a terminated plan, I questioned how to report certain transactions.

This plan had a plan year ending December 31 and more than 300 participants, and terminated effective Aug. 31, 2016. All assets were distributed in early 2017. The final SB will be for 2016 and the final 5500 will be for 2017.

Due to the plan termination, many participants elected to receive an annuity form of payment, and several bids were requested for purchase of annuity contracts for these individuals. Estimates were done in late 2016 and the sponsor deposited a huge contribution in December 2016 to fully fund all benefit liabilities based on these estimates. Once the final bids came in during early 2017, and all benefits were distributed, there were excess assets of more than $1 million. Assets were in non-interest-bearing accounts, so this excess amount can be directly attributed to the December 2016 contribution deposit.

Based on advice from legal counsel, amendments were prepared and executed allowing for the return of excess contributions due to a mistake of fact. According to the letter from counsel, under the facts and circumstances, the excess amount was contributed due to a mistake of fact and is therefore not a reversion. A deduction was not taken on this excess contribution, and the 2016 Schedule H will show the full contribution going in during 2016, with a payable at year end.

Via the ACOPA listserv, I requested opinions from other pension actuaries regarding the amount of contribution I should report on the 2016 SB in December 2016, and whether or not I should prepare an attachment for Line 18 on the SB. Some actuaries questioned whether or not this excess amount is actually due to a mistake of fact or should be considered a reversion. Since legal counsel was involved and amendments executed, I was satisfied that the return of contribution was not a reversion.

In order to be a legitimate mistake of fact, the mistaken fact would have had to be in existence at the time of the contribution, the contribution amount was determined using this mistaken fact, and you could not have realized the fact was wrong at that time. Receiving bids from insurance companies was the best estimate of what the benefit liabilities would be, so depositing a contribution to fully fund the plan (leaving some room for changes) based on this information is a reasonable thing to do. Administrative delay and volatility in the interest environment caused the final bid to be less once the actual purchases of these policies were made, resulting in excess assets. 

Regarding the amount of the contribution to report in December, most agreed that the net amount should be shown. The excess amount is treated as an asset mistakenly held in the pension trust. Another option to consider was to reflect two separate transactions: the entire contribution deposit in December and a negative contribution in January to reflect the refund. I decided to show a single contribution equal to the net amount that was applicable to the 2016 plan year. 

There are pros and cons to including an attachment to Line 18 detailing the situation. There was a suggestion to consider full disclosure by including the attorney’s opinion letter with the attachment. However, no one can say whether or not any attachment will result in an audit, so I chose not to include an attachment with regard to Line 18. 

Since there is no specific guidance on this matter, a reasonable approach was chosen to prepare the SB, and should the plan ever be randomly audited, the files will contain any backup information as needed.