Deducting the unfunded current liability

[FAPInJax]

EGTRRA expanded 404(a)(1)(D) to allow the deduction of the unfunded current liability.

A valuation is being performed as of 1/1/2003.

Is the new maximum determined based on the values as of the valuation date??

May / must they be revalued as of the end of the year??

I would think the numbers would be calculated at the valuation and experience would either work or not. Another actuary wants to consider the additional accruals through the end of the year BUT this means they must also use assets at the end of the year for consistency.

I have not found a good site for regulations. I have found a great site for code access.gpo.gov/ecfr. Check it out!

[Mike Preston]

I thought the IRS gave us rules on calculation of current liability. Didn't those rules specifically call for inclusion of benefit accruals in the plan year, discounted to the valuation date?

[david rigby]

Not sure of other cites, but these are from the Gray Book:

QUESTION 93-14

Special Unfunded Current Liability Funding Limit -- Various issues

The following questions relate to the special maximum deductible limit under §404(a)(1)(D) which is equal to the unfunded current liability:

(a) Are plan assets reduced by the credit balance in the funding standard account?

(B) Should the unfunded be projected to year-end?

© Does this calculation override the Full Funding Limitation? For example, the regular Full Funding Limitation is zero, but the Unfunded Current Liability is $60. Is the deductible limit $60?

RESPONSE

(a) No. Plan assets are only reduced by undeducted contributions.

(B) Yes. The unfunded current liability is projected to the end of the plan year. (See Question 11).

© Yes. The maximum deduction limit under §404(a)(1)(A), including the full funding limitation, does not apply to the deductibility of the unfunded current liability under §404(a)(1)(D). Therefore, in the example, $60 would be deductible.

QUESTION 95-18

Funding Limits -- Determination Date for Unfunded Current Liability Limit

Question 33 from the 1992 Gray Book dealt with the timing of contributions for purposes of deductibility when the maximum deductible amount was derived from the minimum required contribution. The answer to that question stated that only the amount of the contribution needed to avoid a funding deficiency on the date that the contribution was actually made would be deductible. Is this also true if the maximum deductible amount is dependent on the unfunded current liability of IRC §404(a)(1)(D)? For example, assume that the beginning-of-year unfunded current liability (including “normal cost”) is $1,000,000, and that the end-of-year unfunded current liability is $1,070,000. If the plan sponsor were to make a contribution of $1,070,000 on the first day of the year, would the entire amount be deductible, or only the first $1,000,000?

RESPONSE:

Existing guidance does not deal with whether (and how) the section

404(a)(1)(D) limit may be adjusted to the end of the year and whether the timing of the contribution affects the deductible amount.

[Mike Preston]

Historically, the IRS has ignored the timing of the contribution when determining the maximum deductible amount. The determination is always at the end of the fiscal year. I wasn't very clear when I said adjusted to the valuation date. What I should have said was that liabilities are calculated as of the valuation date and then, if that date is not the last day of the fiscal year, further adjusted (or adjusted back, if you will) to the last day of the fiscal year.

I have no cite for this, but I seem to recall that the adjustment is both a liability and an asset adjustment. Hence, if the assets at BOY are $50 and CL is $100, then both are adjusted to EOY with appropriate valuation assumptions, which may, of course, differ, such that the UCL is not merely $50 adjusted at at single interest rate for a year.

[FAPInJax]

Thanks for the responses!

I had completely forgotten that the unfunded current liability was already defined for larger plans.

I agree with Mike that generally the IRS has permitted the maximum deduction to be determined as an end of the year number and deducted regardless of the actual contribution date. The projection to the end of the year would follow the same rules for the projection used for the full funding limit (in my opinion).

Thanks again!