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Effen

NO 412(d)(2) elections for amends after PYE

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I hope I'm not breaking any rules, but I thought this was important for members of this board to be aware of an interesting developement coming off the COPPA board. If you are an actuary and a COPPA member, you should read this long message stream.

Basically, it comes down to Jim Holland (and many begrudgingly agreeing) that an amendment to increase in benefits that is adopted in the 2 1/2 months after the PYE CANNOT be recognized for funding in the prior year.

Maybe someone knows an efficient way to allow everyone on this board to see the entire discussion post, but in my opinion, it was just too long to cut/paste into a message. I just posted a link to the message and Jim's summary comments since he did a nice job with the sites.

http://finance.groups.yahoo.com/group/Coll...s/message/32388

From: CollegeofPensionActuaries@yahoogroups.com [mailto:CollegeofPensionActuaries@yahoogroups.com] On Behalf Of Jim Holland

Sent: Thursday, February 10, 2011 8:17 AM

To: CollegeofPensionActuaries@yahoogroups.com

Subject: RE: [CollegeofPensionActuaries] RE: Unfreezing the frozen

I will make what I expect to be my last comment on this topic. Prior to the issuance of the final regs, everything that Norm and Jeff have said could be a reasonable view of 412(d)(2). The final regs have an explicit provisions that

1. State that require that plan provisions adopted no later than the valuation date and that take effect by the end of the plan year be taken into account. 1.430(d)-1(d)(1).

2. Plan provisions that take effect in a later plan year are not taken into account even if adopted by the valuation date for the current plan year. 1.430(d)-1(d)(1).

3. An amendment for which a 412(d)(2) election is made is considered adopted on the first day to the plan year but when the amendment takes effect is unaffected by an election under section 412(d)(2). 1.430(d)-1(d)(1)(ii) and 1.430(d)(1)(iii) last sentence

4. If a 412(d)(2) election is made and the amendment takes effect by the last day of the plan year, the amendment is required to be taken into account. 1.430(d)-1(d)(1)(ii) last sentence

5. For purposes of paragraph (d)(1) (1.412(d)-1(d)(1), plan provisions taken into account, general rule), the determinatin of whether an amendment increasing benefits takes effect and when it takes effect is determined in accordance with the rules of section 436© and 1.436-1©(5). 1.430(d)-1(d)(1)(iii)

6. The regs under 1.436-1©(5) provide that an amendment that increases benefits takes effect under a plan on the first date on which any individual who is or could be a participant would obtain a legal right to the increased benefit. 1.436-1©(5)

7. The preamble discussion (sentence cited earlier) states that an amendment to provide increased benefits retroactively with respect to a prior year, but no participants benefits are increased until the amendment is adopted, the amendment takes effect at the time of adoption and must satisfy the requirements of section 436© for the plan year the amendment is adopted. 10-15-2010 Federal Register, page 53024, first column

All of the above statements should not be arguable because they come straight from the regulations, and anyone can look them up. The interpretation and effect can be argued about. The key words are the ones "take effect" because the regulation (IMHO) has now linked the taking into account for 430 funding (and by implication 404) and 436.

In doing so, it appears to change what all (including myself) had viewed as the interpretation of 412(d)(2). Now for a cautionary note. As I understand it, the Supreme Court decision earlier this year on the medical residents and FICA regulation addressed the deference given to tax regulations and gave them what is called Chevron deferance. That appears to mean that as long as they are a reasonable view of the law they will be upheld. (Let the attornies tell you the exact interpretation.) Even if you do not like a regulation, the question you have to face is what it actually says and means, and what risks you want to run for your clients or yourself in taking a view.

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When professionals post to BL or other bulletin boards, such posts should be viewed as no more than professional opinions. When Mr. Holland posts -- and in the manner he posts -- his content takes on an aura of government opinion owing to his well-respected reputation and long-term, recent government ties. In short, his words have weight (mine don't). As such, the government is more likely to consider and possibly rely on his analysis than they would on my articulating the exact same words. Absent his analysis, we cannot conclude that the IRS would have employed the same reasoning or determined the same. IMHO (and I'm not looking for agreement), Mr. Holland should be careful to wear his new and not his old hat.

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First, as y'all (mostly) know by now, I'm not an actuary. But if I'm reading Mr. Holland's summary correctly, it seems to me to leave out a piece of the argument, or maybe it is just my interpretation of what trumps what. (And I didn't read the actuarial discussion on the Yahoo group, so perhaps this has been brought up already) What about 1.430(d)-1(d)(2)(iii), which specifically appears to contradict the theory that you are bound by the rules in 436©?

It seems like the prior interpretation is still valid - that is, such amendment to increase benefits, if made within the 2-1/2 months and satisfying all the other requirements, can still be taken into account for the prior year for funding/deduction purposes?

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Enrolled Actuaries are encouraged to participate in the ASPPA College of Pension Actuaries by joining ASPPA.

The discussion on this issue was intense and very technical. Eventually, the argument came down to a contradiction between the wording within the regulation and the intent stated in the preamble.

I continue to hold the position that an amendment increasing benefits can be made for the 2010 year during the period 1-1 to 3-15 of 2011. I believe that the technical problems within the regs will need to be resolved within Treasury, and that good people will make the case for this.

Naturally, that amendment must comply with 436 funding ratios before it can be effective.

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From 2011 Grey Book - Q/A - 4

QUESTION 4

Funding: When to Reflect a Plan Amendment Adopted Within 2-1/2 Months After Year End

The final §430 regulations provide that a plan amendment is reflected in FT and TNC if adopted no later than the valuation date for the plan year. In the case of an amendment adopted after the valuation date, the amendment is reflected in FT and TNC if the plan administrator makes the election in §412(d)(2).

However, in both cases, the amendment is taken into account only if it takes effect on or before the last day of the plan year.

Assume a discretionary amendment (i.e., an amendment that is neither required for qualification nor integral to an amendment that is required for qualification) is adopted within the §412(d)(2) period of 2-1/2 months after the end of the prior plan year to increase the benefit formula for prior service for all participants that worked at any time during the prior plan year. If the plan administrator makes the §412(d)(2) election, can the amendment be reflected in FT and TNC? Does the answer depend on whether a §436 contribution is required? On whether plan operations had actually reflected the amendment in the prior year? On whether the amendment is reflected for coverage and nondiscrimination purposes?

RESPONSE

In this situation the amendment is only reflected if it is adopted and takes effect by the end of the prior plan year. In general, if a discretionary amendment is adopted after the plan year that provides for increases in the prior year, there is no legal right to the increased benefits until adoption. Such an amendment takes effect when adopted (assuming §436 permits), and could be taken into account for the adoption year if a §412(d)(2) election is made for that year.

If a discretionary amendment is implemented operationally during a plan year (thus creating a legal right in the plan year) adoption is required by the end of that plan year [see Rev. Proc. 2007-44]. Any corrective amendment that meets the requirements of §1.401(a)(4)-11(g) that is adopted after the end of the plan year is treated as being effective in the year preceding the year the amendment is adopted for purposes of coverage and nondiscrimination, but that treatment will not apply for minimum funding (or deductions) as noted above.

2011 -4

The above Response is a summary, prepared by representatives of the Program Committee, of the oral responses to the question posed to certain staff members of the Treasury and IRS, which represent only personal views of the individuals who provided them. Accordingly, the Response does not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any taxpayer for any purpose.

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I am deeply disappointed at this decision by IRS staffers.

It prevents good practices needed by many small businesses, who make their pension contribution decisions while compiling their financial results after year end.

This deserves further discussion at a higher level.

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I would like to solicit opinions regarding an amendment made within the 2 1/2 months but effective to the first day.

Let's say an amendment increases the formula from 50% to 75%.

A participant quits 11/2010 and earns an accrual credit.

What formula is his benefit based on?

Does your answer change if you do not find out about the termination until after the amendment is signed??

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It would depend on how the amendment is worded. If the plan is amended effective 1/1/2010 and simply increases the formula from 50% to 75%, how can you argue someone who is an active participant on 1/1/2010 would not be entitled to it?

I suppose the amendment could be written to exclude people who terminated before the adoption date, but then I think you would need to test it for discrimination. If the person that termed is an HCE, probably no issues, but if you they are a NHCE it seems like it would be difficult to prove that the timing of the amendment was not discriminatory.

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"appears to mean that as long as they are a reasonable view of the law they will be upheld"

The regulation interprets the law. Does that mean a clear law can be overridden by a regulation (or by a preamble to a regulation)? Just wondering.

The law states, IRC 412(d)(2):

Certain retroactive plan amendments.

For purposes of this section, any amendment applying to a plan year which 412(d)(2)(A) is adopted after the close of such plan year but no later than 2½ months after the close of the plan year (or, in the case of a multiemployer plan, no later than 2 years after the close of such plan year), 412(d)(2)(B) does not reduce the accrued benefit of any participant determined as of the beginning of the first plan year to which the amendment applies, and 412(d)(2)© does not reduce the accrued benefit of any participant determined as of the time of adoption except to the extent required by the circumstances,

shall, at the election of the plan administrator, be deemed to have been made on the first day of such plan year.

...

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I hope I'm not breaking any rules, but I thought this was important for members of this board to be aware of an interesting developement coming off the COPPA board. If you are an actuary and a COPPA member, you should read this long message stream.

COPA was the original group, and ACOPA was the merged group. What is COPPA?

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https://www.asppa.org/News/Article/ArticleID/5805/Good-News-for-412-d-2-Amendments

As you all know, it looks like the IRS sided with law over regs in the issue of plan qualification (a late FYI), but funding and deduction still remain as issues. From the article:

  • In December, the IRS issued an internal memorandum instructing EP Determination and Examinations employees that an amendment made in the first 2½ months of a year that increases benefits for service in the prior year does not adversely affect a plan’s qualification. The memo advises that this type of amendment is not a “discretionary amendment” that must be adopted before the end of the prior year, provided the amendment was not “operationally effective” until after the end of that prior year. This, of course, describes a typical “412(d)(2) amendment.” We are very pleased that this aspect of our 412(d)(2) concerns has been favorably resolved.
  • Funding and deduction concerns regarding 412(d)(2) still have not been addressed, and probably will not be resolved in the near future.

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Based on what I'e seen, the IRS is still taking a strange view of how 412(d)(2) amendments are supposed to work.

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A little different twist here - what about an amendment to decrease a contribution credit for an HCE for the prior year, adopted within 2-1/2 months after the PYE?

I know we do not have a discrim issue as we are talking about an HCE. but not sure when we trip 411(d)(6) issues here. 

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Not only tripped, but flat on your face.

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