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emmetttrudy

110% Test - Restricted Employee

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My understanding is that assets need to be 110% or more of Funding Target after taking into account distribution in order to pass this test. Am I thinking about this right?

Total Plan FT = 3,597,271

Total Participant FT = 279,619

Total Plan FT After Payout = 3,317,652

Total Assets = 3,491,773

Total Lump Sum Payout Amount to Participant = 328,305

Total Assets After Payout = 3,163,468

So if the assets remained where they are the ratio after the payout would be 3,163,468/3,317,652 = 95%

In order to get this up to 110% there would need to be a contribution of approximately $486,000.

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Math looks just fine.

1. What is specific plan language?

2. Either plan says FT or plan says CL.

3. If plan says FT, then you may be tied to FT on val date. Not sure what this implies if end of year val.

4. If plan says CL, then follow or establish precedent. e.g., could ve valued on val date or distribution date using interest rates on applicable date.

5. IRS says MAP-21 interest rates would apply if FT used and MAP-21 implemented in 2012. (As Mike Preston correctly points out, the IRS did not say this. They simply implied that you could infer this.)

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During the 9/27/12 IRS teleconference on MAP-21, Mike Spaid said that absent regulations you should "do something reasonable" and he went on to say that if using the Funding Target is reasonable, and MAP-21 impacted the Funding Target, it might also be reasonable to use the MAP-21 Funding Target.

ATA posted this here post

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OK so here is a follow up question on this. Typically if the test is being performed part of the way through the year we'll take the January 1 FT and TNC numbers and roll them forward at the plan's effective interest rate for however many months the projection is being doen in order to come up with the Plan's total liability.

What if the calculation is being done say in March of the year PRIOR to anyone accruing a benefit for that year (assume 1,000 hour requirement for accruing a benefit). Should you add in the Plan's and participant's TNC when doing the calculation? Or should those be zeroed out because at the time the test is being run no benefits have been accrued at that time of the year?

For example, if we're testing at October 1, 2012:

Total Plan Liability = FT at 1/1/2012 plus interest at EIR for 9 months PLUS TNC at 1/1/2012 plus interest at EIR for 9 months

Total Participant Liability = same just on an individual basis.

If the test were being done as of April 1, 2012 would the second part of that equation (after the PLUS) just be zero?

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1.401(a)(4)-5(b) defines Determination of current liabilities. For purposes of this paragraph (b), any reasonable and consistent method may be used for determining the value of current liabilities and the value of plan assets.

Thus, unless the plan document specifies a precise treatment, the methods you're proposing would respect this definition. Just be consistent and would recommend that retirement committee adopt the procedure.

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Follow up development to this topic...there is a large group of employees that will be entering the Plan on 1/1/2013. The current Plan will be counting service for vesting for these employees from their prior employer (it was an acquisition). But when these 70 employees enter on 1/1/2013 they will do so with a FT = 0, right? Since as of the valuation date of 1/1/2013 they will not have accrued a benefit? So this should not affect the test, unless it is run part of the way through the year after the new entrants have accrued a benefit, at which point we would need to take this into account.

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at which point we would need to take this into account.

"Would need" depends upon the procedure being used to perform the test. I.e., if you're using a snapshot approach -- and I'm neither endorsing nor pooh-poohing -- then their accruing a benefit during the year would not affect the test. It's interesting, however, how we get locked into snapshot approach for essentially all of the funding calculations but then eschew the snapshot approach for the 110% test because it doesn't feel right to exclude benefits accrued after the valuation date and up to the date of distribution.

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Does anyone have anything to add regarding this issue, and in particular, the use of HATFA rates to determine the FT (a proxy for currently liabilities)? As I see it, the IRS did not publish MAP-21 rates for 2015 so even if you agreed it was okay to use MAP-21 but not HATFA, where would you get the rates? (I.e., good faith estimation of MAP-21)?

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Absent formal guidance of course,

Are we in agreement that if the plan document includes the exception "... equals or exceeds 110% of the value of current liabilities, as defined in Code Section 412(l)(7)", the calculation should only be done using such methodology?

If the languaged stopped at "current liabilities", would it be open to interpretation of how we define current liabilities?

Or should the plan be amended to specifically use Funding Target if we do not want to be stuck with using 412(l)(7)?

I realize that part of the regulations state that the method has to be reasonable and consistent.

Thanks much!

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The Pension Protection Act of 2006 removed Code Section 412(l).. Q&A 30 from the 2008 Gray Book states:

PPA Other DB Plan Issues: Top 25 HCEs

Until the IRS issues formal guidance for the Top 25 HCE rule after PPA, does the existing rule continue to apply? If so, how should it be applied?

RESPONSE

The Top 25 HCE rule continues to apply. Until additional guidance is issued, it would be reasonable for the sponsor to continue to use a method consistent with prior practice (i.e., continue to use a current liability type approach). It would also be reasonable for the sponsor to assume current liability can be replaced with the “funding target” concept introduced by PPA.

See §1.401(a)(4)-5(b)(3)(v) which states that “any reasonable and consistent method may be used for determining the value of current liabilities and the value of plan assets.”

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Question 42 of the 2014 Gray Book addressed this. The response to the question (which was primarily about changing which measure would be used from one plan year to another) reiterated the "reasonable and consistent" standard and questioned whether switching between funding target based on HATFA or MAP-21 and no-relief segment rates would be within the parameters of a reasonable interpretation. Clearly, for 2012 years, usual segment rates to MAP-21 rates would not be considered a change at all (ditto for MAP-21 to HATFA for 2013, if HATFA was used, or 2014, if HATFA was not used in 2013).

Certainly, since PPA became effective, basing the determination on Funding Target assumptions would, by itself, be acceptable as a proxy for Current Liability. It might not be good enough to just use beginning of year values - that was not good enough in the days of Current Liability. Without anything making the use of HATFA rates inconsistent with prior top-25 determinations, I would not think that there is anything to stop the use of HATFA rates. The usual intention is to permit the lump sums without restriction whenever possible, right? So one should generally strive to use the highest discount rates that would be considered reasonable. At this time, that would call for HATFA rates.

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