Deductibility of unfunded PVAB upon termination = ?

[Guest Happy Actuary]

We are terminating an underfunded DB plan (< 100 ees) which the ER will make sufficient. Under IRC 404(a)(1)(D)(i), we can deduct up to the unfunded current liability.

My question is whether the deluxe option under 404(a)(1)(D)(iv), where the entire unfunded amount, can be applied if the plan is not subject to the PBGC.

On the surface, the code seems to indicate that a plan must be covered by the PBGC for this to be allowed. However, a co-worker clearly recalls some post-EGTRRA discussion where people felt that a plan need not be PBGC-covered for (iv) to apply.

Any ideas w/b appreciated!!

[AndyH]

I could be wrong, but my damaged memory banks seem to think that MGB had pointed out in some posts on this subject that there was some type of mistake in the law that has the effect of not requiring PBGC coverage for this rule to apply. You might try a search if nobody else is clear on that off hand.

Are you D.T.?

[david rigby]

One or more of these might be your reference:

http://benefitslink.com/boards/index.php?showtopic=20562

http://benefitslink.com/boards/index.php?showtopic=15502

http://benefitslink.com/boards/index.php?showtopic=10990

[Blinky the 3-eyed Fish]

BTW, my understanding is that the unfunded liabilities replace the UCL in the year of termination, not that both are available.

[MGB]

You are looking at an old copy of the Code. The title of the paragraph said (when EGTRRA first passed) that the paragraph was an issue about plans covered by PBGC, but the paragraph was not that (through a mistake in overlaying it instead of adding a new paragraph). However, a later law (JCWAA?) did a technical correction and changed the heading. A current version of the Code would have no reference to the PBGC.

[david rigby]

IRC Section 404(a)(1)(D). According to the description at the top of the page, as of January 7, 2003.

http://frwebgate.access.gpo.gov/cgi-bin/ge...=Cite:+26USC404

“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).”

My copy of the Code is dated January 1, 2004 and is identical to above.

[Guest Happy Actuary]

but doesn't subsection (iv) limit the special deductibility to plans that are covered by the PBGC?

Sorry I am so naive on this.

[MGB]

The CCH version that I have in a desktop book (1/1/03 edition) says "(iv) Special Rule for Terminating Plans", historical notes show title was changed by Public Law 107-147, section 411(s) (which is JCWAA), with amendments effective as if included in EGTRRA.

Don't know why your references are wrong, Pax. (It is very troubling, actually...because, what else did they miss?)

Note that in a court, titles of sections of the Code carry no weight whatsoever (this was strongly pointed out with 411(b)(1)(H), which the title refers to accruals after normal retirement age, but the paragraph has been used against cash balance plans, e.g., IBM, for all pre-NRA accruals).

[AndyH]

pax, that link is no good. I've been using it also and discovered that the updated dates are no good. In fact, all of the IRC links throught BenefitsLink are outdated, it appears to me. The GPO printing office's version is also outdated. I've gone back to BNA after using the online links for years. I discovered this recently with the interest rate stuff that my code version was missing sections even though it indicated that it was current.

[david rigby]

I stand corrected. My 2004 version, and BNA, use "(iv) Special Rule for Terminating Plans". Clearly the reference to ERISA 4041 would apply only to PBGC covered plans.

[Guest jmincin]

In regard to item (ii) of the remark from pax (see below), any opinions on whether a new plan needs to restrict the current liability for the HCEs for purposes of the unfunded current liability and the maximum deduction?

I don't generally consider the adoption of a new plan to be treated as a plan amendment. I haven't had a situation until now where this was an issue, but as I understand it, a new plan is allowed to deduct up to the unfunded current liability (including the full current liability for the HCEs).

And would the answer change depending on whether the plan gives credit for service prior to the effective date of the plan?

(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.

[Blinky the 3-eyed Fish]

Jim Holland at the LA Benefits Conference said that the adoption of a plan was not an amendment for this purpose. I take that to cover all situations, including granting past service. Of course if your benefit formula has much substance you will run against a 415 dollar limit quickly, so you aren't going to get some huge deduction because of the rule.

Pax, I am unclear on your opinion. Do you think the rule for terminating plans applies to both PBGC covered and non-PBGC covered or just the former?

[david rigby]

With respect to the "2-year lookback", perhaps Gray Book 2002-3 will help:

Funding: Limit on Deductible Contribution to Unfunded Current Liability

EGTRRA extends the IRC 404(a)(1)(D) "Unfunded Current Liability" deduction to multiemployer plans and to plans that cover 100 or fewer participants. However, for plans covering 100 or fewer participants, unfunded current liability shall not include liabilities attributable to benefit increases to highly compensated employees from amendments made or effective (whichever is later) within the last 2 years.

1) When does the "last two years" begin?

2) Is a plan year of less than 12 months a "year" for "last two years" purposes?

3) Does the prohibition on reflecting recent amendments apply to multiemployer plans that cover 100 or fewer participants?

4) For this purpose, is the date on which a plan amendment is formally adopted the date it is “made”, or may an earlier date be considered the date an amendment is made if the plan is operated consistent with the amendment for amendments that reflect changes in the law or annual updates of IRC limits?

5) If an amendment is adopted under IRC 412©(8), is the date on which it is "made" deemed to be the start of the plan year for which it is treated as effective for IRC 412 purposes?

RESPONSE

1) Two years prior to the beginning of the plan year for which current liability is determined.

2) No, a short plan year is not a year for this purpose.

3) Yes.

4) An amendment is made on the date it is formally adopted. Annual cost of living increases in statutory limits such as those in IRC §§401(a)(17) and 415(b) are not considered "amendments" for this purpose. No guidance was given as to whether changes made at the time of EGTRRA compliance would be considered "amendments" for this purpose.

5) No, for this purpose, the date the amendment is made is the date as of which the amendment is adopted.

Copyright © 2002, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

Blinky,

I'm often wrong, but I don't see how one can apply subparagraph (iv) to any plan that is not covered by the PBGC.

[Guest Happy Actuary]

I agree with the last comment, i.e., I don't see how it can possibly be interpreted to apply the fuller deductibility to any non-PBGC covered plan.

I find this confusing, as much of the historical discussion seems to imply that the "corrections" done to this section did extend the deductibility to non-PBGC plans. (in addition to fixing the other obvious error(s).)

Just so I have it straight - a plan not covered by the PBGC can not use the enhanced deduction in (iv)?

BTW, thanks to all for your swell responses!!

[Blinky the 3-eyed Fish]

I'd like to hear from MGB. BTW, I wouldn't use the term "fuller deduction". The deduction to bring the plan to fully funded status could easily be less than the UCL.

[Kirk Maldonado]

Blinky:

For the benefit of us non-actuaries, could you explain why you said "The deduction to bring the plan to fully funded status could easily be less than the UCL."

That result doesn't seem intuitive to me, but I'm not an actuary, so my knowledge on these matters is pretty limited, to say the very least.

[Blinky the 3-eyed Fish]

The UCL is based on the 83 GAM mortality table and an interest rate range set at the beginning of the plan year in which the valuation is done. The actual plan liabilities can be based on any mortality table and a myriad of interest rates, with an overriding 417(e) rate and mortality for lump sum payouts.

There is also the question of the timing of when the 2 values are determined. The UCL is a value at the end of the plan year (a projected value for a BOY valuation date and a known value for an EOY valuation date). It is not clear as to when the unfunded liability determination is made (at least not in my mind).

So those are the differences in a nutshell.

[Kirk Maldonado]

Thanks Blinky.

[Blinky the 3-eyed Fish]

MGB, I would still like to hear if you maintain that the unfunded liabilities is for all plans or just PBGC plans for the year of termination.