Fifth Circuit upholds conservative actuarial assumptions for pension plan contributions.Vinson & Elkins, a large law firm, established qualified individual defined-benefit pension plans defined-benefit pension plan A pension plan in which retirement benefits rather than contributions into the plan are specified. Thus, a retired employee who has reached a certain age with a given number of years of service and has earned a certain income is for its partners. With a defined-benefit plan Defined-Benefit Plan An employer-sponsored retirement plan for which retirement benefits are based on a formula indicating the exact benefit that one can expect upon retiring. Investment risk and portfolio management are entirely under the control of the company. , the employer contributes and deducts an amount that, together with accumulated contributions and expected income, will produce the defined retirement benefit. To compute the proper contribution amount, actuarial ac·tu·ar·y n. pl. ac·tu·ar·ies A statistician who computes insurance risks and premiums. [Latin assumptions must be applied. Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. section 412(c)(3) requires these assumptions to be "reasonable"--either individually or collectively. Further, they must, as a whole, represent the actuary's "best estimate" of anticipated plan experience. The Vinson & Elkins actuary actuary One who calculates insurance risks and premiums. Actuaries compute the probability of the occurrence of such events as birth, marriage, illness, accidents, and death. used conservative estimates to calculate plan contributions. For instance, the actuary assumed a 5% annual return on plan assets and a retirement age of 62 and used conservative mortality tables. As a result, greater funding amounts and deductions were required. For 1986 and 1987, Vinson & Elkins contributed and deducted $10.8 million and $5.1 million, respectively. The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. disallowed about 80% of these amounts on audit, arguing Vinson & Elkins's actuarial assumptions were too conservative and therefore unreasonable. In a big win for the taxpayer, the Tax Court upheld the assumptions as reasonable. The decision was appealed to the Fifth Circuit. Result: For Vinson & Elkins. The Tax Court was correct in saying the actuarial assumptions were reasonable. * Vinson & Elkins (5th Cir., 1994). |
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