Employee Plans actuaries generally review the actuarial certifications of reserves for post-retirement medical benefits. Some of the certifications reviewed were clearly determined using unreasonable assumptions. For example, in one case, the actuary assumed that plan participants would incur $50,000 in medical costs above those provided by Medicare every year of their lives. In another case, the actuary failed to consider the time value of money. In a third case, the actuary assumed that plan participants would incur over $500,000 of medical benefits on their first day of retirement.
Actuarial certifications based on unreasonable actuarial assumptions may result in:
- Disallowance of deductions for contributions to a welfare benefit fund
- Penalties under Internal Revenue Code Section 6701 for the actuary and the actuary’s firm
- Referral to the Joint Board for the Enrollment of Actuaries for actuaries enrolled under ERISA
Additionally, an actuary who is involved in the planning or design of an inappropriate arrangement may be subject to penalties under IRC Section 6700 and possible injunction.
A welfare benefit fund is a trust or other fund that is part of a plan through which an employer provides welfare benefits to its employees. Companies may deduct contributions made to a welfare benefit fund for post-retirement medical benefits if the plan meets the requirements of IRC Sections 419 and 419A. Among other requirements, any reserve established for post-retirement medical benefits must be:
- funded over the working lives of the covered employees,
- actuarially determined on a level basis, using assumptions that are reasonable in the aggregate, and
- determined on the basis of current medical costs.