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OR just interpret the section so that it does not apply to small plans (the at-risk assumption). This is similar to what they have done for EOY valuations and the transition interest segment. "The IRS actuary verified that his answer is correct, that the transition segment rates are based on the applicable month (i.e. valuation month) only. While the language of 430(h) which references 412(b)(5)(B)(ii)(II) might imply that the 30-year treasury rate involved in the transition is the BOY rate, this is not the position the IRS is taking. "

Has anyone figured out how to deal with quarterly contributions for an EOY valuation? Advance contributions are increased at the effective interest rate to the EOY. However, if they are not made timely, it would appear the increase is lessened to cause a larger contribution (similar to a BOY valuation).

Welcome to PPA! This is a common occurence with cash balance plans. My understanding is that the only way around it is to use the at-risk rules which generally enable a first year cash balance plan to have a contribution equal to the contribution credit.

Thank you for the cite. This cite only relates to the interest rate though. Another source is telling me that the mortality table for earlier ages and lump sums changes in 2009 as well. I was under the impression that for retirement ages prior to 62 (for example) and lump sums that the mortality table to be used was still 1994 GAR (the other source indicated it was now going to the 2009 Applicable mortality table)

Someone mentioned that Technical Corrections now uses the new 417 mortality tables for 415 lump sums beginning in 2009. I read where small employers may provide a fixed 5.5% interest rate (ignoring the 105% rule??) for maximum lump sums but did not see the above. Did I misread or overlook something?

The following data is used in the example: Participant age 55 retiring at 65 and has 5 years of accrual / service. The formula is 100% of high 3 with a valuation date of 1/1/2008. Compensation 2007 200,000 2006 150,000 2005 100,000 Benefit for funding target (200,000 + 150,000 + 100,000) / 3 * (5/15) = 50,000 Benefit for target normal cost (200,000 + 200,000 + 150,000) / 3 * (6/15) - 50,000 = 23,333.33 Benefit for cushion 200,000 * 5/15 = 66,666.67 Therefore, my maximum would be the target normal cost plus funding target plus 50% of the funding target plus the difference between the cushion and the funding target less assets. Now, a different scenario. A similar plan, however, compensation is only recognized while a participant as it is a new plan. Benefit for funding target is zero (no compensation) Benefit for target normal cost 200,000 * (6/15) = 80,000 (however, this should be limited to 1/10 of the 185,000 dollar limit?) Benefit for cushion 200,000 * 5/15 = 66,666.67 Therefore, my maximum would be the target normal cost plus the difference between the cushion and funding target. The latter example seems to be a strange result.

Unfortunately, I believe you must burn to get back to 60% if you can.

The IRS has kind of described the calculations necessary for valuing death benefits - permitting the recognition at the BOY for funding target purposes of the death benefit. Termination benefits would take the benefit payable at termination and determine a present value and multiply by the probability of withdrawal from the plan. The law refers to valuing benefits accrued or earned during the year. There is no reference to vesting. Should vesting be applied during the the valuation?

Your last comment is most interesting. I have had several clients question whether it is worth maintaining any balances at all - EVER! It just creates a lot more work and has many potential pitfalls. They have questioned whether it is possible to structure a statement for their actuary where IF it appears that there is a balance, then immediately burn it to avoid any of the issues. By the way, the math looked OK and I could not think of any options that you did not. Additionally, there is very little chance of any client understanding the need for all the complexity. I hope the additional contributions you mentioned are deductible under the maximum for 2008?

An easy way to see what the 417(e) rates will become is to look at the PBGC segmented interest rates. They are the 417(e) with a 1 month lookback (no transition). I agree that with those rates - 417(e) minimum lump sums no longer have the upper hand in distributions (especially for most small plans where the interest rate is 6% or less??)

My understanding is that Jim Holland has stated several times during conferences and workshops that this is not set in stone. I believe the argument would go something like this: The provision that everyone is reading is meant to apply to a plan which is potentially subject to the at-risk rules BUT is not currently at risk. They would be able to use the at-risk rules to put additional monies away moving there further away from potential issues. They have refused to comment on 404 during discussions with them regarding unclear / not issued regulations.

Well, the IRS has refused to 'cave' with respect to at-risk calculations being used for a plan that can never be subject to the at-risk calculations. Therefore, I would rather not hang my hat on that. I do not like the idea that the contribution (adjusted for interest) is required for minimum purposes and therefore is deductible under the 404 rules.

What about the situation where the funding target is zero and the initial year max and min are equal? Assume a BOY valuation and a final required contribution of 10,000. The client makes the contribution on 12/31/2008 of 10,600 and it is appropriately discounted to the valuation date using the effective interest rate of 6% (ignore the quarterly contributions issue as well - to try and make this as simple as possible). The deduction rules appear to limit the deduction to 10,000. Any and all comments are welcome.

Small plans use the Optional Small Plan tables which are gender distinct. One option would be to fund for 100% lump sums which would then use the Applicable table which is gender neutral (being a 50/50 blend of the Optional Small Plan tables).

The calculation of the PBGC variable premium is based on the methodology used during your normal valuation. An assumption of 100% lump sums is made for 1/1/2008 for the valuation. Lump sums in the plan are defined to be the greater of AE or the 417(e) rates - using the proposed regulation method of funding interest segments. The PBGC though has different interest rates (4.93, 6.13 and 6.69) for purposes of calculating their liability. How is the lump sum calculated for PBGC purposes? a Lump sum is computed using the greater of PBGC rates or AE b Lump sum is computed using the greater of 417(e) per the valuation OR the lump sum at retirement discounted to attained age using PBGC rates c Something else Thanks in advance for any and all comments.

An additional question: The new discount rules for contributions do not apply until 2009 plan years. Therefore, 2008 contributions are not discounted. Given that there is no discount - what happens to the client who misses the quarterly date in 2008. The regulations permit you do use the new quarterly penalty rules but what happens if you don't?? No quarterly penalty at all for 2008???

A new plan is beginning 1/1/2008. The sole participant is 72 years old and is anticipated to retire at 77. The 415 $ limit is roughly 500,000 at 77. He has 10 years of service already and has compensation of 400,000. I realize that the 415 compensation limit is now based on the 401(a)(17) limited compensation which effectively limits his pension (unlike the good ol' days <G>). However, what benefit can he accrue during 2008?? a) 1/10 of the 415 $ limit (50,000) b) the compensation limit (230,000 - using the 10 years of service and anticipating 5 years of participation at retirement) c) something else My personal preference is for a)

First assumption is that EOY valuations will be OK (in some geological time period). The effective interest rate is the singular rate which produces the same funding target as the segmented rates. Therefore, it can not be determined without performing the valuation. This interest rate is used to adjust the contributions to the valuation date. This means that EOY valuations must determine the effective interest rate prior to completing the valuation because the adjusted prepaid contributions have to be subtracted from the assets. Is that correct??

I was part of the group of software providers which met with the IRS to get 'guidance' with respect to PPA issues. The fact that Technical Corrections did not pass prior to Congress leaving for vacation means that there will be no timely regulations with respect to this and other issues. HOWEVER, IRS did say that they had an alternate plan in case this situation arose. They should be issuing guidance with respect to these issues since Congress adjourned without passing Technical Corrections.

A plan has a non-uniform retirement age of 62. Therefore, the benefits must be normalized to 65. I understand that testing assumptions are used for the conversion so the ratio of the APRs is easy. However, is it an interest only or interest and mortality adjustment?? Does it depend on whether the definition of actuarial equivalence includes pre-retirement mortality??

The following question was posed and I offered to post it to BenefitsLink. A DB plan is being tested and there is a subsidized early retirement benefit in the plan at say 62 with NRD at 65. The subsidy is only available if the participant has 25 years of service. When testing the most valuable benefit - is it the participants service at testing date (say now the participant is 55 with 20 years of service) or projected service to the most valuable testing age?? Thanks for any and all comments.

You might consider moving this to the DB section instead of the 401(k) section. OOPS, WASN'T PAYING ATTENTION WHERE I POSTED. BUT IT'S MOVED NOW --- BLINKY. I believe I agree with you (as I just posted a similar question). There is an exception to the 436 if you plan is reasonably well funded (which your example is not). Therefore, the calculation you have proposed appears to be OK. The client makes the contribution and creates the credit balance allowing the mony to be recognized and then subtracted (what a great plan <GG>). You then burn the credit balance to get back to where you want to be!!

There are various funding percentages calculated and used for different things under PPA. However, one particular series has raised some questions. AA Actuarial value of assets FT Funding target CB Credit balance PF Pre-funding balance AN Annuities 1 FTAP (AA - CB - PF) / FT What is this percentage used for?? It appears it may go on the new Schedule B (SB). It also appears to be the percentage used for the notice to participants? (Interesting when you have a large CB and the numerator is zero - telling the participant there plan is 0% funded) 2 AFTAP (AA - CB - PF + AN) / FT This one controls the restrictions under 436 I believe it also controls the use of the credit balance / pre-funding balance against the quarterlies and minimum contribution. However, there appears to be a special exemption calculation for this (also used for the establishment of a shortfall base??) (AA / FT) if this percentage is greater than 92 (2008) / 94 / 96 / 100 (2011) Does this number then appear on the Actuarial Certification (if the exemption is used?)? The regulations say something like 'for purposes of 436 and this section (but not section 430(d)'. I am not sure what 'this section' refers to (although I believe the reference to 430(d) is referring to the calculation for the use of the credit balance / pre-funding to offset the minimum contribution. Is this latter correct? Thanks for any and all input.

This is the perfect situation for a cash balance plan. There are 'accounts' that each partner can see and track. There is also the 'new' law permitting the account balance to be treated as the PVAB.

Now that we have regulations and know all the answers <GGG>. A client is well funded (AFTAP > 80%) and therefore can elect to use the credit balance / pre-funding balance. Are all contributions ignored for purposes of the quarterlies until the balances are used up? For example calendar year plan and client makes a contribution 4/1. The credit balance would naturally cover the first quarterly. Is the credit balance used and the contribution justs gets adjusted (and used to offset future quarterlies if necessary). Once the client makes the election to use the balances are they locked in? Is this another 'consulting' opportunity to advise the client the options of using / not using the balances?