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FTAP vs. AFTAP


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one person defined benefit plan with january 1st valuation date.  the plan has a single lump sum feature.  the 2017 AFTAP was certified to in june 2017 and equal to 150% and the FTAP was 95%.  the plan has a substantial prefunding balance resulting in the difference in the FTAP and AFTAP.

plan benefit formula is amended in august 2017 from 5% of comp. to 6% of comp. and the new formula applies to prior years of service.

i assume a new 2017 AFTAP needs to be certified. that being the case, the new 2017 AFTAP taking the new benefit formula into account is equal to 120% and the new FTAP is 70%.

other than the plan being subject to quarterly contributions and not being able to use the prefunding balance to satisfy the minimum contribution requirements, are there any other reasons why i would need to burn a portion of the prefunding balance to increase my FTAP to the 80% or 100% threshold? i assume a mandatory burn is not required since my AFTAP is above 80%.

some insight would be helpful.

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I understand the lack of concern regarding being subject to quarterlies in an overfunded (and likely to stay that way) plan. But I don't understand maintaining a PFB whhich results in a funded ratio so low that the PFB essentially becomes unavailable to use. But, in either case, it doesn't make much difference to things (other than moving around the algebraic formulas) if the client will be contributing well in excess of the minimum required contribution each year for the forseeable future.  I would quarrel with one thing you said, though. A mandatory burn takes place on the first day of the fourth month of year X+1 if the AFTAP for year X is less than 90% (and not less than 80%) [or, for completeness, if less than 70% (and not less than 60%)].

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Agreed - if the sponsor is interested in making maximal contributions, stashing chunks into the PFB doesn't make the greatest amount of sense.  Isn't it all focused on accumulating enough money to pay the lump sum?

As a fall-back, why not make sure each year to burn enough PFB to keep the FTAP above 80%?  How much cushion against contribution volatility do they need?

Always check with your actuary first!

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There might be some other reasons, such as:

-  Does a collective bargaining agreement have anything to say about it? (Obviously, not relevant in this case.)

-  Does a corporate loan covenant have anything to say about it?

-  Since the AFN contains the AFTAP, does the sponsoring ER want to make sure to communicate the AFTAP of at least X%?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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29 minutes ago, david rigby said:

There might be some other reasons, such as:

-  Does a collective bargaining agreement have anything to say about it? (Obviously, not relevant in this case.)

-  Does a corporate loan covenant have anything to say about it?

-  Since the AFN contains the AFTAP, does the sponsoring ER want to make sure to communicate the AFTAP of at least X%?

In reference to the third bullet point, I may have missed something (quite possible, alas!), but I do not recall having ever seen anything requiring the AFTAP to be put on the annual funding notice.  The FTAP, sure, and always with the credit balances pulled out of the assets, but never an AFTAP (which would reflect adjustments to the numerator and denominator for annuity purchases and, in most instances, with the assets unreduced for balances if greater than the funding target).

As an additional point with regard to the original post - provided that the amendment does not bring the AFTAP down from 80% or more to less than 80%, amendments adopted during the plan year after the valuation date do NOT require either that the AFTAP be recertified or that the actuarial valuation itself be revised.  The example in the original post would permit deferral of recognition of the August 2017 amendment into 2018 (assuming that the valuation is as of the first day of the plan year and that there are no material differences between the rules for a 1-person plan and other plans, for I know little or nothing about special rules applicable to 1-person plans).  The same is, of course, true of either big market losses or heavy utilization of a plan's lump sum option if already present.

Always check with your actuary first!

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Touché.  You are correct: should be FTAP rather than AFTAP (we put them both, if different).

 

 

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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