With every new version of our favorite technology – such as smartphones, televisions, and even cars – we can accomplish or experience something better than we were previously able. The computer has certainly helped the actuary by increasing the speed and accuracy in which calculations can be made.
But like many trade-specific tools, the available actuarial software was largely available only to actuaries and required more than just a general understanding of actuarial principles to properly utilize.
This has changed with a new website created by the Society of Actuaries, the main governing body for the actuarial profession. This site puts a simple yet powerful tool in the hands of non-actuaries. It can be found here: afc.soa.org/#Calculator. (Note: if this direct link doesn’t work, use this link instead, www.soa.org/resources/tables-calcs-tools/act-practice-tools-landing/ and click the “learn more” link under the “Annuity Factor Calculator”.) It allows the user to calculate an actuarial annuity factor. Having the annuity factor doesn’t do the non-actuary any good, unless the person knows how to apply that value. We hope to give you a basic understanding of how an actuary uses an annuity factor, enabling you to understand and reasonably approximate the numbers in a LOSAP valuation report.
The annuity value is used to determine the Actuarial Present Value (APV) of a future obligation. In our context, the obligation is a lifetime monthly service award benefit payment. The APV is then the current lump-sum cash value, in “today’s dollars” of that lifetime monthly service award.
If we remove the word “Actuarial” from APV, we are typically removing any decrements, like mortality (life expectancy), disability, and withdrawal (employment termination) from the calculation. Excel can easily calculate the present value of fixed-number of payments with a constant interest rate, whether a lump-sum payable in the future or a series of annual or monthly payments payable over a designated period.
A simple example of present value would be to consider that you owe someone $1,000 one year from now. If we assume that we will earn 5% in our savings account during the year, the present value is about $952. If we have $952 in the bank, and earn 5% on that $952 during the year, we will have $1,000 at the end of a year. If we will only earn 1% on our savings account, then the present value increases to $990! That is because we will not earn as much interest, so we need to invest more in our savings account today to have the $1,000 one year from now. The complications ratchet up when we consider a payment that might be $1,000 per month for an individual’s lifetime starting a year from now, and not just a one-time payment.
While there are other assumptions the actuary could make in the calculation, for most LOSAPs the two main assumptions are an interest rate and a mortality table. Some factors the actuary must consider:
Ultimately, the APV of a monthly service award is: Monthly Benefit x 12 x Annuity Factor = APV
The Annuity Factor is where all of those assumptions are baked into one number.
When you first access the tool online, you should see something like this:
There are several different options/assumptions that can be selected. For the more curious reading this article, in the header of the website there is a “Technical Terms” link. By clicking that link you will get more detailed information about some of these options.
In a typical actuarial valuation of a LOSAP, the actuary does not assume mortality before the entitlement age (the tool calls it Mortality Before BCA). The use of a projection method on the mortality varies. For our purposes, we made the following changes:
After making these changes, the resulting annuity factor is 5.7859. Note we did not change the “Primary Annuitant Age” from 45, which means this factor is only for a 45-year-old and based on the assumptions we noted. That being said, if this 45-year-old had accrued a $200 monthly benefit, the APV would be $13,886. In plain English, this essentially means we need $13,886 in the bank today in order to pay a 45-year-old male $200 per month for the rest of his lifetime beginning at age 62.
Where you can experiment a bit with this tool is to make changes to the assumptions, such as:
There are a couple limitations to this tool that you must be aware of, especially when trying to compare results to your actuarial report or participant statement:
This free tool from the Society of Actuaries is a valuable resource to help municipalities, participants, and auditors understand a bit of the actuarial mathematics and to verify that the calculations in the actuarial report. You will not likely get a 100% match on the APV you calculate compared the actuarial report, but you should end up with a reasonable approximation. We hope you will give it a try!
At this time, most Fire Departments are back to some variation of normal. However, the Governor did extend the State Disaster Emergency through February 26, 2021, which means it could be possible to award more points for cancelled events in 2021. We will continue to monitor and keep you updated.
On December 30, 2020, Governor Cuomo signed Executive Order 202.87, which effectively extended the State Disaster Emergency until January 29, 2021.
Therefore, this means that if fire departments continue to be in a situation where events are cancelled or firefighter responses are being limited, that points could be awarded for January 2021. Since the statute allows for 5 points per month, and pro-rated for periods of less than one month, as of now it would seem 4 points is the most that could be awarded for January. However, we expect a new Executive Order will be signed extending the State Disaster Emergency further.
An interesting note is that the governing municipal board must adopt the resolution by April 30, 2021. If the State Disaster Emergency is extended beyond April 30, 2021, we will likely need legislative relief regarding this deadline.
Anyone who works (or volunteers) in local government understands lines and boundaries. One side of the street pays taxes and receives services from one municipality, and the other side, a different one. Ultimately, at 12:00 AM on January 1, 2021 we cross a boundary into a new calendar year. This means many things – some practical and literal, and some that are just plain emotional. The challenges we all faced in 2020, and continue to face today, will persist into 2021. However, the resilience and perseverance we all developed in 2020 will as well and, for that, we're encouraged about 2021.
As we look forward to the reporting that must be done in 2021, we thought it would be helpful to send a reminder regarding several year-end items, which include some updates and changes:
Remember - we don't send alerts when a new post goes up on our blog, because we don't like to spam people with unwanted emails. If you are plugged into Facebook or Twitter, you can follow us there and receive a notification whenever a new blog post is released.
We look forward to serving you in 2021. Thank you for your trust – it is our daily goal to validate the faith placed in Firefly Admin.
We've now had several people contact us regarding letters they've received from the New York State Department of Taxation and Finance. They are "Statement of Proposed Audit Changes" and were sent because the State believed the subtraction of the LOSAP payments from the payees taxable income was done incorrectly for the 2017 tax year.
In the cases we've specifically reviewed, the LOSAP payment received by the individual is eligible to be subtracted from New York State income, but the individual did not take the subtraction correctly.
On the 2017 IT-201 (the NYS Resident Income Tax Return form), New York subtractions are listed on lines 25 to 31.
Line 26 is where NYS retirement system payments and Federal pensions are to be listed. LOSAP is not either of these and this is not the correct place to take the subtraction.
Line 29 is where a taxpayer is allowed to subtract up to $20,000 of "other pensions and annuities". Prior to 2014, this is actually where a taxpayer would exempt LOSAP payments from NYS income tax pursuant to a ruling from the Tax and Finance department. But that changed with the April 2014 change to the NYS Tax Law; therefore, this is not the appropriate place either.
Line 31 is where "other" subtractions are to be listed, and references form IT-225. If you review form IT-225, you will find that the LOSAP subtraction is subtraction S-130. That is the appropriate place to take the subtraction, which then flows through back to Line 31 on the IT-201.
However - it is important to note there are two stipulations in order to qualify for the subtraction. First the taxpayer must be over age 59 1/2. Second, the payment must not have been paid as a lump sum. The first condition is easy for the State to determine. The second is not. We don't know if the State is making a judgement call on whether-or-not the payment was a lump-sum; to this point that was not cited as a reason for a notice.
In one situation, the tax form that was received did not indicate that the payment was for a LOSAP, and so the State flagged it. We provided a letter for the individual to send to the State, certifying that the payment was, in fact, a LOSAP payment. In this particular case, the payment was being made from an insurance annuity and LOSAP was not indicated on the tax form.
If you received one of these notices, it is possible you will have to file an amended return and properly take the subtraction.
For 2020, the State has not yet released the 2020 IT-201. As of 2019, the lines referenced above did not change - a taxpayer would still use form IT-225 and flow through the subtraction to line 31. Read the 2020 instructions carefully.
Please contact your tax professional with any questions. This article is not tax advice, but informational only.
Sharing my thoughts and insights on LOSAP, and occasionally other topics.