Coming out of Full Funding

[Guest guppy]

Plan's in full funding - has a negative UAL (ie. $0), a full funding credit, and bases are wiped out.

I've seen both of the following methods employed:

1) let the balance equation fail. it's ok.

2) set up a fake loss base = cb so the equation works.

It's my understanding that either approach is acceptable.

What about this situation:

Plan's UAL is $0, but they do not have a FFC in the FSA. RR 81-213 says when you're coming out of full funding to set up a loss base equal to UAL + CB. Do I have to set up a base in this situation just because I don't have the FFC?

Thanks.

[Blinky the 3-eyed Fish]

The UAL cannot be negative by definition, so the balance equation doesn't fail. See section 5.01 of Rev. Rul. 81-213. I am not sure how you would then have a loss if your prior year hit a FFL. Your expected UAL would be 0 and your actual would be 0. If you had seen a loss set up in the past, obviously someone was not limiting the UAL to zero to make this happen. I don't agree with this methodology, although I too have seen it in action.

In your second question, you say your UAL is 0 and you have a CB. In this case, you don't balance, but that is okay. You wouldn't set up a loss at this stage because you still have no UAL. Instead when the plan comes out of full funding, the first base is set to balance per the cite you quote.

[Guest guppy]

Blinky, thanks. In the first question, the reason I'm out of balance is because I have a credit balance. For example:

UAL = 0

CB = 100

Prior year FFC and bases were wiped

I'm saying that it is common practice to establish a loss base equal to 100, even though you are fully funded. If you don't establish the base, you are out of balance. I'm certain that either methodology is acceptable.

I guess my question is just, in same situation, there is no prior year FFC. Is either method still acceptable?

I think what you're saying is that you would NEVER establish a base until the UAL > 0, right?

Thanks again.

[david rigby]

Disagree. I believe the equation of balance must always apply, and balance.

(The only exception would be where an aggregate funding method is being used and there is no UAL.)

[Guest guppy]

So you would always set up the loss base in my example? I actually prefer this, but as I've said, both are commonly practiced.

Thanks for your opinion.

And you bring up a good point I should clarify, I'm obviously talking only about immediate gain methods.