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Owner-only traditional DB Plan - Re-run valuation for less than 1,000 hours worked?


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We have a plan in which the only participant is the owner.  The 1/1/20 BOY valuation was originally run assuming 1,000 hours (and therefore a benefit accrual) for the participant for 2020, which resulted in a TNC and a MRC > $0 (the plan has no shortfall).  We now get to the end of the year, and due to a down-turn in business, the participant/owner ended up not working 1,000 hours.  Would it be reasonable/allowable to re-run the 1/1/20 valuation showing no expected benefit accrual, which in-turn means no TNC and $0 MRC?

If allowable, would that be considered a change in Actuarial Assumptions for the year as reported on Schedule SB?

Thanks for any insight!

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I don't see how. The 1/1/2020 valuation has to be run using assumptions that were reasonable on the valuation date. If at the end of 2019 it was reasonable to expect that the owner would work 1000 hours in the upcoming plan year then he would be expected to accrue a benefit and have a non-zero target normal cost. If the sponsor gave you information that would make it reasonable to assume as of 1/1/2020 that he would be working less than 1000 hours in 2020 then you could take that into account, and as you said it would be a change in assumptions.

If you wanted to change the valuation date to the last day of the year, then you could take into account the actual hours worked during the year, but that would be a change in method that would require IRS approval.

If you watched Kevin Donovan's ASEA webcast earlier this year (or attended his session at ASPPA All Access last year) he presented a possible workaround to this type of situation that will not eliminate the MRC, but could substantially reduce it, by amending the plan's formula to move the accrual for the year into the funding target and then  you can amortize it over 7 (or, thanks to ARPA, now 15) years.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Another thought is that the 2020 contribution isn't due until 9/15/21.  For the 2021 valuation it might be reasonable to assume < 1000 hours, plus the plan will have a gain since there was no accrual in 2020 - add ARPA to all that, and the 2021 MRC will likely be very low.  

Also, you can probably reduce the 2020 MRC significantly by applying the ARPA changes.

Maybe you can't eliminate 2020's MRC, but between 2020 and 2021, total cash outlay can be significantly reduced.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Theoretical follow-up questions for my own mental notes.  (I did find those slides, C.B., thank you.)  If an amendment and 412(d)(2) election were made within 2 1/2 months after the end of the plan year to freeze benefits as of the beginning of the plan year, that would reduce the TNC to $0, correct?  As less than 1,000 hours were worked and no accrual was earned, the amendment would not be reducing any benefits, so I think it would be ok.  Then I believe would re-run the review to take the freeze into account as of the valuation date.  Thoughts?

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