Effen

Since this question was lifted and posted on the ACOPA board, I felt it was only fair to lift their answer and post it here. I have nothing to do with the answer or question, just trying to provide a service.... We are actually setting up plans just this way, -- and it's working out as follows -- First of all, No, the plan sponsor may NOT use the PFB generated in year 1 to reduce the MRC in year 2, because of the 80% rule that you cited. However, if the minimum contribution calculated for year 2 is more than the employer wishes to pay, the employer can still waive the existing PFB generated by the year 1 contribution. This is not as effective as applying a balance (which, if allowed, might drop the year 2 MRC all the way to $0), but it can still reduce the contribution significantly (in actual plans, we see it about cutting the MRC in half versus leaving the full PFB in place). Your other questions: 1. If the contribution is large enough, the assets (before adjustment downward by the existing PFB) at the start of year 2 could be larger than the year 2 FT, which includes the benefit attributable to past service plus the accrual in year 1 of the plan. If the assets without adjustment for PFB are large enough to create a FTAP greater than 100%, then there is no need to reduce the assets when determining the AFTAP (see Code §436(j)(3)(A)). If this is the case, the actual AFTAP is over 100%, there are no restrictions, and there is no deemed burn required. If the assets without adjustment are less than 100% of FT at the start of year 2, then you are required to burn some of that year 1 PFB to get the AFTAP up to 60% or 80% - if the plan allows for lump sum or other accelerated distributions. 2. Remember that in the first 5 years of the plan, the only restriction under Code §436 is the restriction on lump sum and other accelerated distributions. If a deemed burn is mandated at the start of year 2 of the plan (see above), it can only be due to the restrictions of IRC §436(d). The rules for making an additional contribution to avoid the funding restriction (IRC §436(f)) state that such a contribution can only be made to avoid the restrictions in §§436(b), 436©, and 436(e). So no, you may not make an additional contribution under 436 to avoid the deemed burn at the start of year 2 of a plan, if such a burn is required. Hope this helps, -- as an aside, nothing in the above answer changes my opinion that this idea (recognizing past benefit service so that year one generates a FT and a cushion that allows the employer to establish a PFB in year one) is the best way to set up a new plan under PPA. From: Sent: Tuesday, May 04, 2010 8:11 AM To: CollegeofPensionActuaries@yahoogroups.com Subject: RE: [CollegeofPensionActuaries] Use of balances There was an interesting question posted on BenefitsLink that I would like to get opinions on. A plan grants past service credit for the first year and therefore the FTAP / AFTAP is zero. The client proceeds to make a large contribution creating a prefunding balance. They would like to use the prefunding balance to offset the minimum in the second year. I do not believe this could be done because the use of the balances requires looking at last years funded percentage and it is required to be at least 80%. A couple of questions come to mind: 1 Does the plan have a required burn of the prefunding balance to get the percentage up to 60/80 (if possible) thereby eliminating some / all of the prefunding?? 2 Could the client make a ‘special’ contribution under 436 which does not get counted towards the minimum (but presumably is deductible) and use it to increase the prior year funded percentage so that the prefunding balance could be used?? Thanks for any and all comments!!

The rules relatating to Critical and Endangered status are fairly complex. You can't simply take a number from the MB and assume it means the plan is Endangered. That said, the actuary certifies the plan within 90 days after the start of the plan year. If the plan is endangered or critical, the trustees have 30 days to inform the participants and bagaining parties. In addition, all participants should receive an Annual Funding Notice. This is to be distribute within 9 months after the close of the plan year. It can be very confusing because most of the information in the AFN is over a year old by the time you receive it. But, it would tell you if the plan was Endangered or Critical in the prior year. http://www.dol.gov/dol/allcfr/title_29/Par...R2520.101-4.htm

I assume Steward is referring to a multiemployer plan, which is generally required to keep written minutes to Trustee's meetings. As amndacatr said, I would start with the fund administrator.

check FreeErisa and see if they are there. If they are, that would prove the client filed them. However, I'm not suggesting that the IRS will actually accept the reality of the situation and leave you alone, but it would give you confidence that they were actually filed.

No guidance as far as I know. We are still just putting it in the AFN (pka: SAR). Nothing really special about the valuation date as far as the notice goes. Of course in most cases they have already missed their quarterlies before they even know the amount due, but that isn't a new problem.

I think you may have misunderstood. In order to get the money out of your plan, you need some triggering event. Generally, you either need to terminate your employment, or you need to terminate your plan (or both). When you terminate your plan, you can ask the IRS to look at everything and confirm that your plan was qualified. Once that IRS confirms this, you are generally assured that your distributions are eligible for favorable tax treatment and can be rolled over to an IRA. If you do not seek IRS approval, it doesn't mean your distributions don't qualify, it just means you don't have a letter from the IRS specifically telling you that it does. Either way, you can roll the money to your IRA, however without an IRS determination, you are slightly more at risk if they audit. Most attorneys’ recommend that you get and IRS determination. The only times I have seen that they might not is if you recently (last year) submitted and received and IRS determination letter for the current document. It is really a question you should be talking to your counsel about, not necessarily your actuary. It does extend the termination process by about 8 months and can be relatively pricey, but you would be generally assured everything is fine with the plan before you take a distribution.

Last year I marked most of the valuations "preliminary" because I knew something was going to change either due to an employer election, change of strategy, contribution date, or just my own clarifications. That caused a little turmoil with some auditors, but ultimately they all seem to accept the reports. This year I took off the "preliminary" but added a list of caveats - assume you elect to do this and contribute that..... Typically we are billing once the reports go out, but before the 5500 is done. That way at least we still have something to threaten them with if they don't pay - which has also become more of a problem in this economy. Obviously every client is a little different. Some we progress bill, some we pre-bill, but usually we are billing once/twice per year.

There is very little guidance on end of year valuations, especially as it relates to AFTAPs, so I can only tell you what we do. Generally we use the EOY numbers as a proxy for the next day's BOY AFTAP. In other words, for 12/31/08 valuation we would use 12/31 numbers (EOY FT + EOY TNC), but treat it like the 1/1/09 AFTAP for benefit restrictions. Like with all AFTAPs now, you CANNOT include receivable contributions that have not been deposited as of the certification date. If you are going to certify the AFTAP before they make all of the prior year's contributions, you will need to recertify it once they complete the prior year's contributions.

I think it should be known as "PPA induced senility" or "penility" for short

We had a few like that as well (where it wasn't our fault) and the PBGC did not let the client use the alternative. We had to refile the form and the client had to pay the higher premium. Once you check the box, you shouldn't check it in the future.

I didn't think that was the way it worked. I thought you only consider the transition percentages when determining if a new base is created and how much that base should be. You don't wipe our prior bases until the actual shortfall (ignoring transitions) is zero.

Yes, I agree. The life only would be the QJSA for a single person, but you don't have to offer it to a married person unless your doc requires

Thanks, I was hoping we were all on the same page with this.

Agree, but you only have to offer the QJSA & QOSA ... and your document has to allow for it.

Assuming there was no 415 violation, I think I would just tell the client to be more carefull if they are going against the specific plan's procedures. We typically also calculate lump sums to the date of anticipated payment with a 2-3 month lead time, but I don't make a fuss unless they pay them late. With all the different ways people calculate lump sums, I can't believe this would be a big problem. The fact he was an HCE is troublesome, but... Heck, I keep hearing stories about people who calculate lump sums to the nearest year.

Has anyone seen anything regarding if the present value of contributions paid after the valuation date for the prior year? Do they need to also reflect the added discount if there were missed quarterlies? For example, let’s say the employer misses the 1/15/2010 quarterly and makes the final contribution on 5/15/10. When I determine my assets for the 1/1/10 valuation, I know I add in the present value of the 5/15/10 contribution, but would I also further adjust it to reflect the fact that there was a missed quarterly? 1.430(g)-1(d) just states "For this purpose, the present value is determined using the effective interest rate under section 430(h)(2)(A) for the plan year which the contribution is made." There is no mention of any additional adjustments due to late quarterlies. What is everyone else been doing?

Not True.The rules are fairly complex, but if there is only a db plan, than there is no 25% restriction. The 25% (really 31%) restriction in 404(a)(7) comes into effect if there is a combined db/dc deduction during the same tax year and the dc deduction exceeds 6% of compensation.

Don't go bringing professional standards into this PPA lunacy. Maybe you can bring it up next week at the EA meetings.

I think they get another free change for 2010.

The "cost" is difficult to quantify. It depends on what rates you use to determine the lump sum and current market conditions. If you simply use 417(e) rates to determine the amount of the lump sum, it could produce liabilities higher or lower than the funding target (assuming you are using segment rates). Since the segment rates have a 24 month average built into them and the 417(e) rates do not, the segment rates will be higher or lower than the 417(e) rates at any given point. When segment rates are higher (like they are now) lump sums are higher than the funding targets. If the segment rates are lower than the 417(e) rates, lump sums wil be lower than the funding targets. PPA changed the playing field. Assuming you are using only 417(e) rates for lump sums, the only change in the funding target would be the mortality. However, the "shut down" liabilities may move +-20% (SWAG) depending on the rates at any particular point in time. If you use something other than 417(e), the impact will be based on the rates you choose. Lower rates, higher change. Now, go hire and actuary

Seems to me that if he signed the plan document, then he has a plan. Just because you ask the IRS not to look at it, doesn't mean you no longer have a plan. If everyone ends up whole, then if might be "no harm no foul", but I would look closely at anyone who might be impacted by his attempt to delay the effective date. For example, did anyone terminate during 2009? How about the vesting provisions? Personally, I would want a lot of cover from an ERISA attorney before I did much of anything on the plan.

It just seems strange that if the plan's actuarial equivalent section had said the lump sum was based on the greater of 5.5% or the 417(e) assumptions, I would have a funding target of $1.75 million, but because my document only references the 5.5% stuff in the 415 section, I get a funding target of $1.6 million. Same benefit to the participant either way, but significantly different funding targets.

Consider the following: 1) Sole plan participant has accrued a benefit equal to the 415 limit 2) Plan offers lump sums solely based on the 417(e) rates 3) Participant is at retirement age and has elected to retire during the year. The Funding Target Segment Rates produce a liability of $1.6 million. The lump sum based on 417(e) Rates is $1.9 million The max 415 lump sum (5.5%) is $1.75 million What is my Funding Target? I know 417(e) is not relevant, but what about the 415 limit? The 430 Regs say I "must take in account" an alternative lump sum basis to the extent the value is different from the present value determine using the segment rates, but it also states that if the basis of my lump sum strictly 417(e), than I should ignore the current 417(e) rates and just use the segment rates (other than differences caused during the transition period). So in my case I "know" the plan will be paying the 5.5% lump sum during the year, so should I consider that an "alternate basis" so that my funding target is $1.75 million and not $1.6 million?

I voted deferred lump sum because you said you were assuming the lump sum would be paid. I think you could change that assumption to something that better fit your situation. I don't think you are required to assume a lump sum payment anytime one is available. "1.430(d)-1(f)(4)(ii)(A) The probability that future benefit payments under the plan will be made in the form of any optional form of benefit provided under the plan (including single-sum distributions), determined on the basis of the plan's experience and other related assumptions"

so my option would be that a SOB notice isn't necessary since the document gives the greater of the two anyway. However I would argue the document language is a little lacking since in the first year after NRD it should be the accrued benefit as of NRD that is rolled up. That language seemed to imply it was the accrued benefit at the end of the prior year. Also, I have heard IRS rumblings that the plan still should give an SOB notice or it would be forced to give both the rollup and the age/service accrual. I can't remember the exact context, but I remember being a bit surprised when I heard/read it.