Andy the Actuary

Before sweeping under the matress, you may wish to find out who is at risk for penalty (e.g., plan administrator) and how much. A 1099-R with a cash distribution that does not show withholding may be a flag. Also, the recipient could be in the position to incur penalties for underpaying quarterly taxes. This is not to say that we have a landmark case here; rather, just apprise yourself of where those airborne pooping ducks are flying.

Ye olde 412(m)(1) provides an interest charge to the amount of underpayment equal to the greater of the valuation interest rate and 175% of the Federal Mid-Term Rate. Thus, there would be no credit if 175% of FMTR is less than the valuation interest rate. See IRS Notice 89-52. IRS_Notice_89_52.PDF

NTIYI (not to insult your intelligence) but have you checked that plan contains the restrictions? In the 401(a)(4) regs that Professor Sieve cited, the rules apply unless the Commissioner determines they are not required. For example, it's possible to get his removed in a plan sponsored by a not-for-profit organization. For exaqmple, if it is omitted and a d-letter was obtained. The FT is a kin to the CL, which fortunately, was never specifically defined. My clients have been operating on good-faith (my good faith) and concluding that 110% of the FT is a reasonable proxy.

I believe the approach that is being followed in the case of a generous plan actuarial basis for lump sums is to determine the lump sum using the plan rates and discount using the single segment rate. For example, if the payment is expected in seven years, then we have 7px x lump sum / (1 + segment 2) ^ 7

You betcha -- just a few months ago. For your record, I am an EA. Mutual of Omaha said they wouldn't bid until I signed their undated form that did not even have their logo or name and address on it. I.e., virtually a blank sheet of paper. I told the agent we've provided the Plan documents to MofO and it is incumbent upon MofO to price their annuities based upon it. If they wouldn't go for it, we'd just have to seek another insurer. They bid. An EA is required to sign IRS Form 5500 Schedule B, in certain cases the PBGC premium payment forms, and PBGC 500 certification of a plan's sufficiency upon termination. We are not required by law to cover insurance companies derrieres.

It appears that the only election required to use the alternate funding target (e.g., 430 assumptions) to determine unfunded vested benefits is to check a box on the PBGC electronic filing. Is anybody requesting the employer to make a separate written election? I wonder since the election is irrevocable for 5 years how much slainin' practitioners are doing.

In the olden days (pre-PPA), you could have factored in the high rate of return into your investment rate assumption to avoid overfunding. With PPA, you have to be careful that the plan does not push the 415 envelope because it could become overfunded with the high rate of return. In particular, if the sponsor departs the earth prematurely. Also, and this is a legal question, can a plan distribute a loan as an asset in-kind? I.e., if the plan terminates before the loan is repaid, what happens (this question was relevant pre-PPA)?

Thank you. That was helpful. My eyes remembered having read it previously but my mind obviously didn't. At least the preamble to the regs addresses the possibility of a deemed election.

Would suggest file for a d-letter stating how assets would be allocated. Then, election packages should make sure each spouse agrees to participant's elections under Notary witness. Old people do get divorced* *The 97 year old husband and his 93 year old wife appeared before the judge petitioning for a divorce, that they hadn't been able to stand being in the same room with each other for almost 65 years. When the judge inquired why they waited so long to get divorced, they replied, "We wanted to wait until the children were dead."

Here's why I'm questioning. There appears to be a contradiction. This is from the August 2007 proposed regulation: "F. Elections Under Section 430(f) The proposed regulations would provide that an election under section 430(f) is made by the plan sponsor by providing written notification of the election to the plan’s enrolled actuary and the plan administrator, must be irrevocable when made, and must satisfy certain timing rules. The written notification must set forth the relevant details of the election, including the specific amounts involved in the election with respect to the prefunding balance and funding standard carryover balance. An election under section 430(f) generally must be made on or before the due date (with extensions) for the filing of the plan’s Form 5500 ‘‘Annual Return/Report of Employee Benefit Plan’’ for the plan year . . ." So, does this "F" override the quarterly requirements or do the quarterly requirements override "F"? I would argue that "F" overrides the quarterly requirement since the application of the FSCOB is at the beginning of the year. That said with full confidence, don't ask me how I've done in the market!!!!

Yes, we are on the same page as in the example there is no shortfall amortization but the contention is there is a minimum contribution in 2009 -- the TNC -- because as of 1/1/2009 assets net of FSCOB are less the %FT. Because you subtract the FSCOB from assets in 2008 for testing whether or not there are quarterlies for 2009, the conclusion was there are quarterlies for 2009. The question is do you really have to futz with quarterlies or can the employer elect simply to apply the FSCOB as of 1/1/2009 to reduce the the entire years obligation?

Agree.

How many have observed combo plans where the DB plan provided for the TH minimums to be provided by the DC plan and the DC plan provided for the TH minimums to be provided by the DB plan? Presumably, while you won't find this in Hoyle, the IRS would find it acceptable to give the TH minimums under the DC plan even though stated otherwise. The critical result is that the TH minimums would be credited.

The test for funding phase-in percent is AVA minus prefunding balance (not carryover balance). My nomenclature may have been sloppy. Are we talking about two different concepts? The AVA-PFB is for measuring whether or not new amortization base is needed. In the example, there is no short-fall amortization base. However, net assets = 2,500,000 - 1,000,000 = 1,500,000 and since this is less than %FT, then minimum contribution = TNC + amortization [0] = TNC. Is this incorrect?? David, as always, thank you for your comments. andy t.a.

Suppose you have plenty of FSCOB and AFTAP supports its use. E.g., as of 1/1/2008, FT =2,000,000; Assets = 2,500,000; FSCOB=1,000,000, 2008 TNC=300,000, and contribution of 300,000 made. Quarterlies ared due in 2009 because of PPA convoluted rule of backing credit balance out of assets to test funded status. It is now 2009 and we find FT=2.300,000; Assets=2,500,000 (diversified in matress in 2008); FSCOB=1,000,000; TNC=300,000. Since net assets = 1,500,000 < 94%FT, 2009 contribution = 300,000 (TNC only; no amortization) and quarterly contributions of 75,000 due. Employer does not wish to make contributions in 2009. To apply FSCOB to quarterlies, we think we must elect a priori. But, can't we just wait until we file Schedule B to have plan sponsor elect to apply FSCOB at 1/1/2009 to reduce year's contribution?

I would lobby for all of us posters to start referring to those pre-plan-termination 204(h) notices as "Preparation H !!"

The PBGC does refer to the "proposed" termination date because they are empowered to nullify it. Otherwise, there is "a" plan termination date -- not one for IRS and another for PBGC purposes. If the PBGC nullifies the termination date (I've seen this happen), then the Plan stays open for funding purposes. Would be interested to hear if this is not the case. Unfortunately, it appears 12/31/2008 is no longer a viable plan-termination date because you can't comply with the participant notice requirements.

You do. Top-Heavy benefits continued to accrue through the end of the 2001 Plan Year on plans that were frozen before the 2002 Plan Year.

Are you saying was benefits accruals ceased because the AFTAP fell below 60% or the Plan was amended to freeze benefits? If the Plan was amended, then TH minimum accruals definitely stop. On the other hand, if the AFTAP fell below 60%, then there is nothing in the proposed regs to say TH benefits continue to accrue. In such case, once the AFTAP surpassed 60%, the TH accruals (or some of them) can be accrued [TH services continues to accrued while the AFTAP < 60%].

Employers have a natural rational now. When PPA was first implemented, restrictions applied because plans were underfunded, which could be inferred to mean money was mismanaged. Now, it's a matter of the (blue) chips falling on the floor and everyone is aware and feeling it. It's not the employer's fault. I'd let employees know. If not to large a group, then a meeting with employees. This could be part of a bigger meeting to explain the plan.

Maybe not now but someday. If you ask the IRS, based upon their history pre-PPA, they will say, "unh-unh" To quote myself, "the more words the IRS writes, the more they open the possibility for a convoluted or undesirable result." Throughout any past IRS pronunciations regarding reasonable funding methods, negative normal cost was verboten. See IRS Rev. Proc. 2000-40 Section 6.02(6).

You can easily see some labor issues. E.g., Calendar year plan. 2008 AF TAP = 90%. Presumptive AF TAP applies April 1, 2009, and no restrictions through September 30. AF TAP certified on September 30 to be 64% and Plan Sponsor cannot fund enough to get to 80%. In March 2009, employee got lump sum estimate for retirement effective September 30 from an uniformed HR person who looked in his handy dandy table of factors and made an estimate. This would be just enough money after taxes to purchase his friends paper airplane business. No one has told the HR guy about Armageddon. Employee retires and then is told can't have full lump sum. Do any of the litigators out there have a business card?

I see it now. Thank you for all your efforts to "show me."

Well, we're getting to it. I am not an attorney. Do the Plan provisions need to incorporate the provisions of 436? There are numerous provisions plans must comply with that are not in the plan, such as 401(a)(4) and 430. I did not see that in the language or in IRC 436(a) so I was not anticipating a retroactive amendment. If the case it is required, your logic makes sense. Otherwise, we're back to thumbwrestling. 3.5 years in Missourah is an eternity to a coaster.

Yes, the whole thing stinks. You effectively eliminate an option by amending the plan to increase benefits and allowing PPA to do its convoluted thing. Good news folks: We're increasing your benefits. Bad news you won't get them. Worse, we're taking away your lump sum option. And it's all legal so go lobby congress who enacted this crud or call The Sieve before midnight tonight, who although his avitar shows that he has chubby thighs, will fight to the demise of his investment portfolio to get you your lump sum. By the way, does anyone even have a wild guess what lobby benefited from the September 1, 2005 magic freeze date? Normally, these laws select the date the law was first proposed, date of enactment, or plan years beginning on or after mm/dd/yyyy.