Practical Import of AFTAP <60%

[Guest merlin]

Is there any if the plan was previously frozen (post-9/05) and doesn't pay lump sums? Does the deemed election of 1.436-1(a)(5) still apply?

Conversely, is there any advantage to maintaining the COB/PFB rather than burning to get back up to 60%?

[FAPInJax]

Unfortunately, I believe you must burn to get back to 60% if you can.

[Andy the Actuary]

Unfortunately, I believe you must burn to get back to 60% if you can.

(5) Deemed election to reduce funding balances--(i) Limitations on accelerated benefit payments. If a benefit limitation under paragraph (d) of this section would (but for this paragraph (a)(5)) apply to a plan, the employer is treated as having made an election under section 430(f) to reduce the prefunding balance or funding standardcarryover balance by such amount as is necessary for the adjusted funding target attainment percentage to be at or above the applicable threshold (60, 80, or 100 percent, as the case may be) in order for the benefit limitation not to apply to the plan.

This paragraph says, "If a benefit limitation . . . would . . . apply" The limitation wouldn't apply since the Plan is frozen and doesn't pay lump sums. Getting to 60% to facilitate benefit accruals also wouldn't apply.

Perhaps, I've overlooked some wording that says you got to effect the reduction? Can you help trace the thread?

[Guest Kabert]

I'm with Andy on this one. I didn't think burning balances was required where it wouldn't do any good -- where it wouldn't help the plan avoid a 436 limitation.

[Guest merlin]

Thank you both. That's a common sense answer. But there have been other instances regarding PPA provisions wher the Boys from DC have espoused anti-common sense positions.

Now, what about the Notice? Participants know the benefits have been frozen by amendment, and that lump lums are not available. The Notice seems irrelevant also, no?

[Andy the Actuary]

ERISA notice to participants and beneficiariesUnder section 101(j) of ERISA, as amended by PPA ’06, the plan administrator of a single employer plan is required to provide a written notice to participants and beneficiaries within 30 days after . . . the valuation date for the plan year for which the plan’s AFTAP is less than 60 percent . . ."

So, if in the end, the AFTAP is less than 60%, notice would have to be provided even though plan benefits are frozen. Further, it appears notices would have to be provided to retirees, beneficiaries, terminated vesteds, and alternate payees as well as to active participants.

[Effen]

Interesting theory.... so, I am presented with the following:

Frozen plan (post 2006) paying non-discretionary lump sums only (ie: benefit restrictions are meaningless)

80%+ funded in prior year

11/1/2008 valuation

Funding Target 17,000

Assets 13,000

COB 0

The employer would like to make a large contribution for prior year (2007). If they put in $599, I'm still < 80% funded, but I create a large COB that I can use to reduce my 2008 MRC.

If they put in $601, it would be forced to burn all but $1 of my COB and therefore they will need to make another large contribution for 2008. Seems silly but I think if they put in too much in 2007 it will force them to put in more in 08.

However, based on your theory, I wouldn't need to burn COB since the restrictions don't apply (post pension relief)?

Do you agree?

[Effen]

Andy et al - I now completely agree that the forced burn only applies if you are avoiding benefit restrictions. So a frozen plan that only pays de-minimis lump sums would NOT be forced to burn COB even if by doing so would make the AFTAP > 80%.

That said, I don't think anyone knows what the de-minimis amount would be if you had a plan that was amended, due to the mandatory rollover rules, so that lump sums less than $1,000 can be forced and lump sums between $1,000 - $5,000 require a participant rollover election, but not a spousal consent. Some are saying it would be $1,000, others $5,000 and the IRS isn't saying anything, yet.

I love the fact that we may need to wait for technical corrections to the technical corrections bill.

[Andy the Actuary]

Mr. Effen, don't know if this helps but recently completed PBGC Form 501. The instructions defined nonconsensual lump sums as those the Plan provides may be distributed without participant/spousal consent.

I find it interesting that (in 2009), a DB Plan could distribute a monthly payment of $16,250 ($195,000 annually) to someone whose pension is at the 415(b) limit but cannot distribute a lump sum sum of $1,100 to someone whose monthly pension is $9. This is similar to requiring spousal consent on a $5,100 401(k) loan but requiring no spousal consent (or disclosure) for someone to drop his life savings in Vegas.

[Mike Preston]

I agree that the IRS hasn't said anything, yet, but I think that most have adopted the position, certainly reasonable in the absence of the IRS weighing in, that the $5,000 threshold applies, whether the individual plan has lowered the force out threshold or not.

[dmb]

Andy et al - I now completely agree that the forced burn only applies if you are avoiding benefit restrictions. So a frozen plan that only pays de-minimis lump sums would NOT be forced to burn COB even if by doing so would make the AFTAP > 80%.

Would the thinking be different if the plan wasn't frozen. Active plan, only pays benefits from pension fund (no accelerated forms), no lump sums (except for small cash outs) or purchase of annuities. Would there be deemed waiver of credit balance if it would boost AFTAP to 80%??? And is the answer conclusive or just an interpretation of regs? Thanks.