Plan Termination in 2008

[Guest Sus95]

Prior to PPA, the funding standard account costs in the year of termination were prorated in accordance with Rev. Ruling 79-237. This revenue ruling references Section 412, and as we know costs for DB plans are now under Section 430 of the code, we need new quidance on how to determine the minimum required cost for 2008 if the plan terminates during this year ( and of course subsequent years under PPA).

There are clients requesting projections of costs if the plan were to terminate this year, and this cannot be calculated yet until quidance is issued.

I have not seen any quidance on this yet and wanted to know if anyone has seen anything that I may have missed.

[Andy the Actuary]

Given the IRS is repudiating IRS Rev. Rule 77-2, it would be quixotic to anticipate that the IRS will address this issue in the near future.

[Mike Preston]

I have no citation, however I can't think of a good reason why that old rule will be any different after the effective date of PPA. Then again, nobody really knows.

I certainly haven't seen anything that directly bears on the issue.

[Guest KennyH]

The old rule stated you pro-rate the funding standard account charges and credits. I don't see any relevant items under PPA funding that would require any sort of proration. We are simply amortizing any unfunded amounts over a 7 year period. For an estimated termination on a plan yet to be frozen plan, why not just assume normal cost accruals to the freeze date and incorporate the expected amendment into the calculation? If the plan is already frozen then there are no issues to consider because there is no NC or funding standard account.

[Mike Preston]

Since when does freezing a plan eliminate the funding standard account?

Under prior law, pro-rating the funding standard account charges/credits in years where the plan's accrual was complete (think termination at end of 6th month in a plan that required 1000 hours of service for an accrual) was similarly situated in that it wouldn't "require any sort of proration". Nonetheless, that is what the IRS decided was appropriate. There were many times that the logic of this position was called into question when dealing with binary accruals in the year of termination. What makes you think the IRS would adopt a different approach this time around?

[Guest KennyH]

Since when does freezing a plan eliminate the funding standard account?

Who said freezing a plan eliminates the FSA? PPA eliminated the FSA.

Under prior law, pro-rating the funding standard account charges/credits in years where the plan's accrual was complete (think termination at end of 6th month in a plan that required 1000 hours of service for an accrual) was similarly situated in that it wouldn't "require any sort of proration". Nonetheless, that is what the IRS decided was appropriate. There were many times that the logic of this position was called into question when dealing with binary accruals in the year of termination. What makes you think the IRS would adopt a different approach this time around?

I don't see how this is applicable. What charges and credits will you be pro-rating if there is no funding standard account?

[Mike Preston]

Whatever the minimum required contribution is for the year, exclusive of carryover balances.

[Guest KennyH]

Perhaps I hadn't really thought through this. As I typed my message I think I started understanding yuor argument.

Under pre-PPA, ignoring funding deficiencies, credit balances, AFC or interest on late quarterlies the FSA is simply (NC + net amortizations) with interst to the end of the year. If we assume NC = 0 we are left with net amortizations and the interest thereon. If the plan terminates on 10/1 we would pro-rate the amortization charges by multiplying by 75% but still take interest to EOY on that amount to caclulate the MRC at EOY, correct?

Under PPA, our MRC is now made up of the Target NC, Shortfall amortization charge, waiver amortization charge and interest on late quarterlies. Similar to above, if we assume NC = 0 and ignore the waiver and late quarterlies, we are then left with the shortfall amortization charge. Are you saying we should be pro-rating the shortfall amortization charge in the same manner we pro-rated the net amortizations under pre-PPA?

I can follow this argument if we ignore the parenthetical statements in the Rev Ruling because the language is general enough. It is the parenthetical statements that specifically reference section 412 that make me see a possible argument against this still being applicable.

[Mike Preston]

I think your write up is a fair one. I think what you are seeing was written before 430/436 were thrust upon us. It is pure conjecture which parts of 412 that moved will be subject to identical rules and which will have brand new rules to deal with. In the absence of clarifying guidance, though, assuming something that used to apply to 412 applies similarly to the new code sections shouldn't raise too many hackles.

To pick a technical nit, I would say the NC is also pro-rated, but 75% of 0 is of course 0.