FAPInJax

I believe that I disagree if I am understanding the question correctly. The deficiency does not impact the required contribution in 2009. The assets remain unadjusted (unlike pre-PPA) and the contribution is based on the available assets. The first contribution made will be discounted back to the 1/1/2008 valuation using either the effective interest rate OR the penalty rate (assuming the quarterly contribution due 1/1/2009 for example was not made) to 1/15/2009 and then the effective interest rate to 1/1/2008. Subsequent contributions can be applied against 2009 and later years on a first in / oldest year basis.

My initial reaction is No (not directly). Now, that being said, there is no mention of the at-risk numbers (which may be used to increase the 404 limit) or the substantial expenses <GGG> which should be added to the cost which affect the maximum again.

I would think that nondiscrimination testing could use the appropriate XXXX Applicable table for testing since the 417(e) table now varies by plan year.

Here is a conversation from the ACOPA boards: I sent Ms. Zimmerman (Carol Zimmerman from the IRS) the following questions following the teleconference and received the following answers: If the 2010 AFTAP is certified at under 60%, but I find that we need to do a 401a4-11g amendment to get a passing discrimination test for 2009, what are the employer’s options for avoiding disqualification? I know one option is to increase the contribution for 2009 to increase the AFTAP for 2010, but what if it is already past 9/15/2010 (they have until 10/15/2010 to make the amendment)? Answer: This is a tough one because you cannot make a direct contribution under 436 to allow for an amendment increasing benefits when the AFTAP is less than 60%. One option would be to make a contribution under 436(e) to get out from under the accrual freeze, and then recertify the AFTAP at 60%, then make a 436 contribution for the amendment. Along those same lines, if the 2010 AFTAP is 70% and we need the 401a4-11g amendment, and the employer chooses to do a 436 contribution in order to allow this amendment to take effect, what is the timing between making the amendment and depositing the contribution? Do they first adopt the amendment and then make the contribution so that the amendment can take effect? Would the contribution then need to take place prior to 10/15/2010 in order to allow the amendment to take effect prior to the 401a4-11g deadline for 2009? Answer: Yes, the contribution would need to be made by 10/15/2010 in order for the amendment to take effect.

I believe this is incorrect. The proration of the shortfall payment will happen only if there is a short plan year. Generally, the termination of a plan does not create a short plan year.

I thought that the first year that the plan would be subject to PPA would be the 11/1/2010 - 10/31/2011 year because the old CBA was still in effect. Therefore, IF I am correct, then you are still under the old funding rules.

What flaw???? Assume that you can buy a monthly annuity that costs $100 for each dollar of monthly pension. This means that A who receives $100 will receive $1 per month. B only receives $10 (maintaining your 10:1 ratio). Now, B is going to the bank with the $10 because the plan terminated and invests the money at 8%. The value of the $10 in 30 years is amazingly $100.63 which means B will receive the exact same monthly benefit at retirement as A despite an allocation substantially less.

There was quite a discussion at ASPPA regarding adding a 'little blurb' to the definition so that it would not exceed the third interest segment which is now required under the new law. So, while 5% may be OK (there is hope that IRS will use it as a safe harbor), several practitioners were planning on amending to ensure that they do not accidentally violate the rules.

The general discussion at ASPPA was that automatic reinstatement should not be done. This was put forth by Larry Deutsch and eventually Tom Finnegan came to agree after discussion.

My understanding is everything is brought back to the BOY (kind of assuming the valuation was there instead of EOY). The result is brought to EOY using the effective interest rate.

The final regulations provide an exception to "carry out the termination of a plan in accordance with applicable law."

A gentleman pointed out to me that the quarterly calculations can be performed as though the plan was a BOY valuation. The resulting numbers are adjusted to the EOY using the effective interest rate and produce identical numbers.

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True. This was a one time shot to include 2007 contributions without having to discount them to the valuation date. It does not apply to 2008 and later contributions.

Works for me!

What happened to the presumed AFTAP of 60% as of 10/1/2009? Doesn't that still kick in for the remainder of 2009??

It could also be that all the participants are generating TH benefits (which are 'accrued' over 10 years)

I believe you will find that it is not OK to time the contributions in that manner. IRS has stated several times that PPA has now imposed a first in, first out type approach to contributions. This may be substantiated by looking at the fact that there is a 'funding deficiency' for 2008 until contributions equaling the minimum required have been made and therefore any contributions are used to satisfy it first. Once that point is reached contributions should be able to designated for 2008 versus 2009. Of course, all of this is subject to IRS interpretation or common sense whichever administrators prefer.

Are there any circumstances where a negative target normal cost is possible?? Should a participant be floored at zero or should the floor be at the plan level? This goes back to the IRS position where they do not particularly care for negative costs.

I have been recommending that clients maintain a 'recommended' contribution method (which may be EAN or Individual Aggregate) - something that has a logical basis for funding the projected benefit. PPA is producing numbers using unit credit and many clients are going to be surprised when their contributions keep jumping every year due to age.

Note the last response from mwyatt that the 'normal retirement date' is not modified. There is an assumption that the participant continues to work for a period of time following that date (a judicious use of a benefit suspension notice - especially to the owner - would remove the actuarial equivalent increase at least until 70 1/2). This generally produces lower funding numbers.

1 The approach is to use the greater of AE or the 417(e) rates. 2 Yes, we are valuing the probability of a lump sum. The problem is not with the present value of the annuity as I understand that part. The problem is when does the 415 limit trigger. For example, a participant is at some 415 maximum benefit. Let's say for the sake of argument that the greater of the AE or 417(e) produces an amount which is in excess of the 415 lump sum at 65. Therefore, the lump sum is limited at 65 to the 415 lump sum using 5.5%, etc. Can this number be discounted for cost purposes using the 4.5% funding interest segment (assuming again the participant is 61 years old)? This produces a number larger than the lump sum 415 at his current age (because discounting at 4.5 instead of 5.5). Thanks for all your comments.

Has anyone seen or willing to admit understanding how to value 415 lump sums when segmented interest rates are involved? For example, assume the interest segments are 4.5%, 5% and 5.5% (funding). Now, a 62 year old retiring at 65 has a maximum benefit and the stream of payments begins discounting using the 4.5% for 2 years commencing at 65, 5% for 15 years and then the 5.5% for the remainder. The 415 lump sum limit is computed using 5.5% for all years. Which present value stream is adjusted OR am I missing something??

How would the cushion benefit be calculated under a cash balance plan? I understand the funding for the funding target (the benefit accrued at the beginning of the year - assuming a BOY valuation) and the increase in the benefit is the target normal cost. However, assume the cash balance plan has been in effect for a couple of years and now the owner starts taking a very large compensation. Does this affect the cushion benefit as it is the accrued benefit recognizing compensation increases?? Any help would be appreciated.

There are a couple of things I have heard of: 1 Amend the plan to have the EOY accrued benefit earned at the BOY. This throws everything into the funding target and no target normal cost. 2 Use 'smoothed' assets (averaged, whatever the correct term is). This produces a slightly higher value for funding (usually 10%). 3 Full yield curve reduces the numbers even further. Welcome to PPA as many clients are finding that because the underlying method is unit credit that modifying the contribution (especially downward is no longer possible or difficult).