120% Jcwaa Rate Under 404

[MGB]

In two different sessions of the EA Meeting, Marty Pippins claimed the 120% corridor under JCWAA for 2002 and 2003 does not apply to 404 maximum calculations.

I don't agree. Section 404(a)(1)(D)(i) says "unfunded current liability determined under section 412(l)." The 120% rule is in 412(l)(7)©(iii) without any restriction to its use (it says it may be used "to determine current liability under this subsection"). It seems the reference from 404 should pick up this rate.

Anyone know why Marty was saying it is somehow restricted to the 105%?

[Mike Preston]

'Tis my day for being confused. Wouldn't the use of 105% always result in a higher 404 limit than if you used 120%?

Since 120% usually gets us to a point these days where the maximum deductible far outstrips the ability to contribute to the plan, it doesn't seem to have much applicability.

Of course, in that one plan where the client wants the absolute limit, this sounds like good news.

[david rigby]

I found this in the Legislative History of JCWAA:

"The provision expands the permissible range of the statutory interest rate used in calculating a plan's current liability for purposes of applying the additional contribution requirements for plan years beginning after December 31, 2001, and before January 1, 2004. Under the provision, the permissible range is from 90 percent to 120 percent for these years. Use of a higher interest rate under the expanded range will affect the plan's current liability, which may in turn affect the need to make additional contributions and the amount of any additional contributions.

Because the quarterly contributions requirements are based on current liability for the preceding plan year, the provision also provides special rules for applying these requirements for plans years beginning in 2002 (when the expanded range first applies) and 2004 (when the expanded range no longer applies). In each of those years (“present year”), current liability for the preceding year is redetermined, using the permissible range applicable to the present year. This redetermined current liability will be used for purposes of the plan's funded current liability percentage for the preceding year, which may affect the need to make quarterly contributions and for purposes of determining the amount of any quarterly contributions in the present year, which is based in part on the preceding year."

Thus, it appears the intent was to grant relief related to the AFR.

[MGB]

Mike, the issue is not with the practical results. Obviously, if someone wants a higher deductible amount, they will not be using 120%. The problem is that everyone has to change their reports to do one more valuation run at an interest rate (105%) that is completely unnecessary (assuming they are running at 120% for the deficit reduction contribution) just to produce a number that the client doesn't care about. Either the extra number has to be produced, or the reports have to be changed to say the number isn't available. Eithert way, it is an unnecessary hassle.

Pax, discussions with the IRS to date show that the legislative history is why they are taking this stance. However, I still don't see their point. If 404 says to use the unfunded current liability under 412(l), then it should use it, no matter how the 412(l) amount was derived. Just because the law only referenced the need to change 412(l), it still flows through to 404 by reference. There didn't need to be any legislative history to make this connection.

[david rigby]

Agreed, but that is the "flaw" in having legislative history: it allows lawmakers to draft the statutes loosely, but say what they mean elsewhere.

This probably will never change.

[Mike Preston]

I don't disagree with you, MGB. I might not use the word "unavailable", but then again, I might.

[Guest DRN]

I think when 404(a)(1)(D)(i) says UCL determined under 412(l) it means using the "concepts" , "terminology" and "definitions" of that section.

The 120% contained in 412(l)(7)©(iii) is only for purposes of determining current liability under that subsection which deals with a very specific 412 calculation, namely AFC.