OBRA Full Funding Limit - Frozen Plan using Aggregate Method

[Rolf Trautmann]

Plan funding method is Aggregate with AL of $10,000,000 and assets of $9,000,000. Entry Age Normal PVAB is $11,000,000 since a frozen plan with PVFNC of $4,000,000, EANC of $1,000,000, and FSA balance of $0. This leads to Full Funding Limit of $0 ($11,000,000 - $4,000,000 + $1,000,000 - $9,000,000, not less than 0). This result seems a bit odd. Any thoughts or comments would be appreciated? Thanks in advance!

[Mike Preston]

My comment is that I don't understand some of the jargon you are using. What, exactly, is Entry Age Normal PVAB and what does it have to do with this calculation? Did you mean Entry Age Normal Accrued Liability? Why are you subtracting PVFNC from EAN-PVAB? Something is amiss, but this is such a jumble that I can't tell what. What does your actuary say?

[Rolf Trautmann]

Sorry about the abbreviations. Total Present Value of Benefits (PVB, not PVAB) is $11,000,000, Present Value of Future Nornal Cost (PVFNC) is $4,000,000, and the Normal Cost (NC) is $1,000,000 all under the Entry Age Normal (EAN) Funding Method. Market Value of Assets (MVA) and Actuarial Value of Assets (AVA) are both $9,000,000. This leads to an Accrued Liability (AL) under Entry Age Normal of $7,000,000. Since we use EAN values for the Full Funding Limit (FFL) determination when the Plan funding Method is Aggregate, the FFL amount of $0 is determined as follows:

EAN-AL plus EAN-NC less MVA equals old FFL or

$7,000,000 + $1,000,000 - $9,000,000 = (-$1,000,000, not less than 0)

I hope this helps.

[Mike Preston]

Ahhhh, much better. Thanks.

What you are describing is the normal sequence of events when a plan is frozen. Frequently, the plan enjoys a funding holiday with respect to the regular funding method. You haven't indicated the plan size, but if it is subject to the Deficit Reduction Contribution you can find a required contribution might be in the cards, notwithstanding the full funding limitation you described so nicely.

[david rigby]

Even if there is no DRC/AFR, there might be a deductible contribution.

My greater concern is the use of Aggregate for a frozen plan. Several prior discussion threads on this topic: it is generally considered an inappropriate method for a frozen plan, at least in years after the freeze is effective.

[Mike Preston]

I'm not sure that is an accurate statement. There are two overriding principles to keep in mind, IMO. First, is whether the IRS would consider it an appropriate method. The IRS has no prohibition against the use of the aggregate method in years after the plan is frozen. I don't believe that the IRS Revenue Procedures on automatically approved changes in funding method allow you to change to the aggregate method if the plan is frozen, however. The only time that the IRS forces you to change funding methods is when the method develops negative numbers where negative numbers make no sense (a most imprecise statement, I admit, maybe somebody else can identify the issues more precisely off the top of their head). The second is whether it is appropriate under the actuarial standards of practice. The current standard does not prohibit the use of Aggregate by a plan that has frozen benefits. That standard is currently being redrafted and while I have my own opinions, I feel it is best to keep them to myself while the standard is being considered. I'm interested in what others feel about this, though.

[Blinky the 3-eyed Fish]

I personally don't see the issue with continuing with either aggregate or individual aggregate for a frozen plan from an actuarial standpoint. The funding is still being spread out over the period to retirement age for the participants.

[Chester]

I had been using Aggregate method for frozen plans in the past, but when I attended the Enrolled Actuaries meeting earlier this year I have it in my notes from sessions which I attended that the Aggregate method should not be used for frozen plans. I don't have any cites, but I have been changing the cost method for frozen plans to unit credit since the EA meeting.

[david rigby]

See prior discussions:

http://benefitslink.com/boards/index.php?showtopic=16493

http://benefitslink.com/boards/index.php?showtopic=19350

Agreed that Rev. Proc. 2000-40 (by itself) does not require changing the funding method, but by including the cited IRS regulation, I think you can build a case for it. At any rate, per Gray Book 99-6, the IRS seems adamant about their opinion. Then you have to decide if you want to fight it. Or more correctly, the plan sponsor has to decide.

[Blinky the 3-eyed Fish]

Pax, both your links refer to discussions when there are no active employees. This is a bit different than the topic at hand.

[Mike Preston]

But 99-6 is, as he points out, quite unambiguous. I haven't tried "building the case", but I think I will take a look at it in the near future.

[david rigby]

Blinky, please re-read second link. Part (b) of Q&A99-6 asks the question about a frozen plan.

[Blinky the 3-eyed Fish]

Pax, my apologies. I see there is some related discussion in that link.