Waiver of Funding Deficiency and the AFR

[Guest dmdoug]

I have a client that will be filing for a funding waiver for 2004. They are subject to 412(l) in 2004 and likely will be for several years if interest rates don't move up significantly. If they are successful in getting their waiver relief for 2004, I don't like what I see for 2005. Even though they get to amortize the deficiency over 5 years, the impact of 412(l) in 2005 means that no matter what the net fsa charges are for 2005, they will owe the DRC amount. As long as 412(l) applies, I see them having to apply for waivers every year because 412(l) acts like an AMT. Am I missing something here?

[david rigby]

Maybe a little. The driving issue is the CL funded ratio. The purpose of the DRC/AFR is to increase this. Period. The presence of a waiver amortization is merely one of the mechanics of determining charges and credits in the funding standard account.

A more important issue might be whether the plan sponsor will qualify for a waiver, since it should be based on temporary business hardship. If they expect to apply for a waiver every year, how is that temporary? Freeze the plan to keep it from getting worse?

[Guest dmdoug]

Thanks pax. The CL% won't change much if the waiver is granted because there won't be much, if any, of a contribution made for 2004. So the DRC will be big again in 2005. What the client really wants is a couple year's relief from AFR.

They are looking at a freeze but this is a negotiated plan (single employer). I told client the IRS would probably expect them to take some action on the benefit side. We have also looked at merging with a multi-employer plan to escape AFR, but so far have found no takers. Other thought was to buy annuities for rets and vts to get count below 100. Not a great annuity market and relief from AFR wouldn't come until 2006 because of the lookback count provision.