Quarterly contributions and JCWAA

[david rigby]

Today is bozo day. Can't find this anywhere, and reading the statute is difficult.

For the purpose of determining whether quarterly contibutions are required for the plan year beginning in 2002, JCWAA allowed the plan to recalculate the 2001 current liability funded ratio using an upper bound of 120% of the CL rate. In order to utilize this, did the 2001 CL rate already have to be at the 105% level?

[Mike Preston]

I don't think so. The rate is determined under the relevant section if it is for 2002 or 2003. But that is just my opinion, as I couldn't find anything on a quick search of resource materials.

[MGB]

A group of actuaries put this question through to Marty Pippins right after JCWAA. He said that you can use the 120% even though the prior year's Schedule B had already been filed using something less than 105%. The use of 120% is not redoing anything for 2001, therefore, it is not conditioned on what actually was done at the time.

[Blinky the 3-eyed Fish]

The redoing of 2001's calculation is conditioned upon using an interest rate above 105% in 2002. Here's a post of mine that got no love. There is an interesting discrepancy though. The regs say that if you use a rate in 2002 you must recompute 2001's CL numbers, but the Sch B instructions say you may recompute.

http://www.benefitslink.com/boards/index.p...89&hl=quarterly

[david rigby]

Thanks for the commentary. I think I agree with your post Blinky, but am confused about your emphasis. For the 2002 schedule B, instructions for Line 1(d)(2)(a) includes

“However, a special rule under Code section 412(I)(7)©(i)(III) allows a rate up to 120% to be used for the 2002 plan year.”

Then, Line 4a includes

“…except that 120%of the weighted average interest rate could be used for the 2001 1(d)(2)(a) calculation if the special rule under Code section 412(I)(7)©(i)(III) is being used for the 2002 plan year.”

The “if” in the latter quote might imply that the Line 4 calculation (which is the ratio I asked about originally) at 120% for 2001 is valid only if it is used on Line 1(d)(2)(a) for 2002. Am I reading too much into this? If this interpretation is valid, anyone see a reasoning why the 2002 rate should be greater than 105% in order to use it for 2001?

[Blinky the 3-eyed Fish]

Pax, I was confused by what part in which you were confused. Here is my understanding. The special rule under Code section 412(I)(7)©(i)(III) is implemented if for RPA a rate in 2002 is used that is greater than 105% of the rate. So, for a calendar year plan, the rate is 5.71% (January 2002). 105% of this is 6.00%. So, if you use a rate greater than 6.00% you MAY or MUST recompute last year's late quarterly liabilities.

The MAY or MUST was my point of emphasis. As you quoted from the instructions to the Schedule B, it says the 120% rate "could" be used for 2001. If you look below to 412(m)(7)(A), it says the rate "shall" be redetermined for 2001. I have always thought that shall means must. When I was told as a kid, "You shall go to your room", I didn't feel I had any options.

I doesn't make any sense that you truly MUST recompute last year's liabilities if you don't choose to, but it also doesn't make sense that there is this discrepancy in the language.

(7) Special Rules For 2002 And 2004

In any case in which the interest rate used to determine current liability is determined under subsection (l)(7)©(i)(III)--

(A) 2002

For purposes of applying paragraphs (1) and (4)(B)(ii) for plan years beginning in 2002, the current liability for the preceding plan year shall be redetermined using 120 percent as the specified percentage determined under subsection (l)(7)©(i)(II).

[MGB]

It doesn't make any difference if it is "may" or "shall". If you don't do it and determine a quarterly that is due, it will equal or exceed the quarterly that you otherwise "may" have computed.

Obviously, if they actually contribute less than what is necessary, you "shall" compute the prior year at 120% so as to not overpay excise tax or late interest penalties. Even if this were a "may", you would still do it.

[Blinky the 3-eyed Fish]

MGB, how can you say doing it one way or the other doesn't make a difference? You can't go wrong if you do recompute, but it is possible have a nondeductible if you don't recompute and should have.

Now, do I think this is really an issue that will come back to haunt you if you don't recompute? No, I don't. I just thought it was an interesting discrepancy.

[Mike Preston]

I'm still of the opinion that the use of any particular rate in 2002 is not required in order to use the 120% calculation for 2001. And what you used in 2001 is clearly irrelevant to the determination. I know this presents calculation issues for those that can't even re-run the 2001 numbers on the higher interest rate, but I don't think the law itself is unclear. The IRS instructions appear to recognize the administrative difficulty and allow one to not recalculate 2001, even though that might result in higher quarterlies than otherwise required and, by definition, a higher deductible contribution for 2002 than otherwise allowable. I think the IRS has decided that the gain is just not worth the pain. Good on them.