Can amendment adopted 2-1/2 months after year end reduce funding?

[Guest Glen]

In a calendar year plan, is it possible to adopt an amendment on 3/15/04, 2-1/2 months after the end of the 2003 plan year, which substantially reduces future accruals (and requires a 204(h) notice) and recognize it in the 1/1/03 valuation?

[David MacLennan]

Yes under 412c8. I believe the amendment should reference two effective dates. With respect to determining minimum funding under 412, the amendment will be effective Jan 1 2003. For determining accrued benefits, of course the effective date must be in 2004 to give the proper notice and to ensure the amendment cannot be misconstrued to reduce anyone's accrued benefit.

Under Rev Rul 77-2, the actuary does not have to recognize amendments adopted after the valuation date.

A 412c8 election must be signed by the plan administrator (the legal plan administrator, not the TPA), and attached to the Form 5500.

[Mike Preston]

The 412c8 election is now a part of the 5500 itself. However, if filing a 5500-EZ the election must be attached.

[Kirk Maldonado]

David MacLennan:

For those of us who are not actuaries, could you tell us why an actuary would or would not recognize a later-adopted amendment? If you want to do that by means of examples, that would be greatly appreciated.

[Blinky the 3-eyed Fish]

Kirk, as a small plan actuary, I can tell you that those amendments are chiefly designed to either raise or lower the required/allowable funding amount per the client's needs.

Mike, you are referring to the Schedule R where the question about 412©(8) is asked. However, the instructions go on to say to see Temp. Reg. 11.412©-7(b) for details on when and how to make the election. Because that line is still there, I continue to attach a separate election that complies with that cite.

[AndyH]

I'm puzzled by this. Can someone provide an example of a 3/15 amendment that reduces a contribution, does not constitute a cutback, and can be treated as effective as of the preceding January 1?

Two effective dates? Has anyone actually done this? And I mean a decrease, not an increase.

[Mike Preston]

Assume you have a plan that provides a projected benefit of 100% of compensation. As of the end of 2003 the individual has an accrued benefit of $4,000 per month and that the projected benefit is $8,000 per month. Assume the contribution requirement based on a projected benefit of $8,000 per month is $75,000. Assume the plan is amended 3/15/2004 to modify the projected benefit to 90% of pay. The accrued benefit, of course, can't be reduced below the already accrued $4,000/month. But the projected benefit is now reduced to $7,200. Assume that the actuary takes the amendment into account for purposes of determining the minimum funding for 2003. Assume that this reduces the required contribution from $75,000 to $69,000. The Schedule B is completed on the basis of the $69,000 required contribution.

[Blinky the 3-eyed Fish]

How about this for an example. I love examples!

Funding method: individual aggregate

Years of participation accrued: 5

Years of participation at NRA: 10

Before amendment:

Benefit formula: 10% of pay times average compensation

Average compensation: 100,000

Projected benefit: 10% * 100,000 * 10 years = 100,000

Present value of future benefits: 800,000 (made up number)

Allocated assets: 300,000

Present value of future normal costs: 500,000

Normal cost: 80,000 (made up number)

After amendment reducing the formula to 2% of average compensation prospectively (i.e. without wearaway)

Projected benefit: (10% * 100,000 * 5) + (2% * 100,000 * 5) = 60,000

Present value of future benefits: 480,000

Allocated assets: 300,000

Present value of future normal costs: 180,000

Normal cost: 28,800

See how it works. The funding is spread over the lifetime of the participant. The reduction in the projected benefit serves to reduce the normal cost. Of course this is a simplistic example and you would factor in the FFL and RPA override.

The 2 effective dates are correct as well. The overall amendment is effective retroactively to the first day of the plan year. The effective date of the benefit formula reduction is effective as allowable by 204(h).

[AndyH]

Thanks. News to me.

[Guest merlin]

Can anyone provide examples of the wording of the notice/amendment? All I can think of is that I'm giving advance notice of an event that has already occurred.

[Lame Duck]

I have a different slant on the question. Over many years, I have heard arguments on both sides of the issue as to whether a retroactive amendment that increases benefits must be made within the 412©(8) period (2 1/2 months after the plan year end) or if it can rely on the more liberal time period in 401(b) since the amendment might affect the qualified status of the plan. Any thoughts?

[Blinky the 3-eyed Fish]

What is the context of your question? Since it is under the DB header I will assume that it relates to those plans. Thus for plans subject to 412 (DB, MP, and TB), then you must meet that 412©(8) criteria or the amendment cannot be considered for funding.

I wonder what the "other side of the argument" is and from whom it came. If there is another side, it is news to me. An amendment to satisfy other issues (ex: a 1.401(a)(4)-11(g) amendment) that is adopted past the 412©(8) deadline, but within the 9 1/2 month deadline, would not be considered for funding.