New maximum deduction

[FAPInJax]

The maximum deduction of the unfunded current liability is now generally available to all plans (with the additional stipulation that benefit amendments during the last 2 years may not be recognized).

The general definition of the unfunded current liability is the current liability minus assets as defined under 412©(2).

Assuming that I am using an asset smoothing method which produces an asset value less than the market value of assets but still within the corridor of 80% - can I get my client a deduction using the lower asset number. It would appear that I can but it just seems too good!

Any comments are greatly appreciated as usual!!

[david rigby]

It appears to me that the definition of UCL in 412 (l)(8) is based on use of the AVA in 412©(2). I conclude that the UCL for purposes of 404 is determined using AVA.

[Blinky the 3-eyed Fish]

I agree and it makes sense. First, use of the smoothing method might cause the AVA to be above the FMV in future years. Also, the increased contribution this year will only serve to reduce future contributions, all things being equal.

Also, technically, you can't recognize only the increase liabilities to HCE's from amendments in the last 2 years.

[LIBOR]

Could someone provide a "cite" for the 2 year rule ??

[Blinky the 3-eyed Fish]

Gladly. 404(a)(1)(D)(ii).

[david rigby]

Section 652 of EGTRRA amended IRC 404(a)(1)(D) as follows:

SEC. 652. MAXIMUM CONTRIBUTION DEDUCTION RULES MODIFIED AND APPLIED TO ALL DEFINED BENEFIT PLANS.

(a) IN GENERAL- Subparagraph (D) of section 404(a)(1) (relating to special rule in case of certain plans) is amended to read as follows:

(D) SPECIAL RULE IN CASE OF CERTAIN PLANS-

(i) IN GENERAL- In the case of any defined benefit plan, except as provided in regulations, the maximum amount deductible under the limitations of this paragraph shall not be less than the unfunded current liability determined under section 412(l).

(ii) PLANS WITH 100 OR LESS PARTICIPANTS- For purposes of this subparagraph, in the case of a plan which has 100 or less participants for the plan year, unfunded current liability shall not include the liability attributable to benefit increases for highly compensated employees (as defined in section 414(q)) resulting from a plan amendment which is made or becomes effective, whichever is later, within the last 2 years.

(iii) RULE FOR DETERMINING NUMBER OF PARTICIPANTS- For purposes of determining the number of plan participants, all defined benefit plans maintained by the same employer (or any member of such employer's controlled group (within the meaning of section 412(l)(8)©)) shall be treated as one plan, but only employees of such member or employer shall be taken into account.

(iv) PLANS MAINTAINED BY PROFESSIONAL SERVICE EMPLOYERS- In the case of a plan which, subject to section 4041 of the Employee Retirement Income Security Act of 1974, terminates during the plan year, clause (i) shall be applied by substituting for unfunded current liability the amount required to make the plan sufficient for benefit liabilities (within the meaning of section 4041(d) of such Act).

[MGB]

Note that (iv) was actually supposed to be (v) and during the EGTRRA conference committee rush to finish overnight, they accidentally overlaid the restriction (not applying to plans not covered by PBGC) in (iv) with the language from a new (v), which was being added. That is why the heading to (iv) does not match the language of (iv) and there is no (v).

In JCWAA, they did technical corrections on this. However, instead of redoing (iv) and adding (v) according to the original intent, they just changed the heading of (iv) and now non-PBGC covered plans can use this provision.

The current heading of (iv) after the technical corrections, which was originally supposed to be the heading of (v), is: "Special Rule for Terminating Plans."

[Guest dsyrett]

Note that (iv) was actually supposed to be (v) and during the EGTRRA conference committee rush to finish overnight, they accidentally overlaid the restriction (not applying to plans not covered by PBGC) in (iv) with the language from a new (v), which was being added.  That is why the heading to (iv) does not match the language of (iv) and there is no (v).

In JCWAA, they did technical corrections on this.  However, instead of redoing (iv) and adding (v) according to the original intent, they just changed the heading of (iv) and now non-PBGC covered plans can use this provision.

The current heading of (iv) after the technical corrections, which was originally supposed to be the heading of (v), is:  "Special Rule for Terminating Plans."

MGB, when you say "and now non-PBGC covered plans can use this provision," are you referring to the UCL rule or the amount required to make a terminating plan sufficient rule?

I've got a situation where I'd like to use it for a terminating plan.

[Blinky the 3-eyed Fish]

He is referring to the latter.

[MGB]

I was referring to the first statement (the UCL calculation in the original draft of the law would not have been applicable to non-PBGC plans). However, the statement applies to both situations because there is no reference to a limitation on non-PBGC plans for any of these rules now.