Quarterly contributions - Year 2 - ASPA Q/A?

[Effen]

A new plan grants 5 years of past service so it has $50,000 of liability and $0 assets at the beginning of year 1. IRS instructions state that in year 1 the answer to Q/A 4 of Schedule B is 100% and quarterly contributions are not required.

The answer to Q/A 4 of the year 2 Sch. B appears to be 0% and therefore quarterlies would be required for year 2.

However, I found the following that appears to contradict this.

2004 ASPA Annual Conference – IRS Questions and Answers:

Q/A 45:  The instruction to the Sch. B provides that for the first year of the plan the funded % should be reflected as 100%.  Quarterly contributions are not required if the funded % for the prior year is 100% or more.  It would appear that, since the funded % for the first year of a DB plan is reports as 100%, quarterly contributions for the second year of a DB plan would not be required.  Does the IRS agree with this conclusion?

A: Yes

Maybe this Q/A didn’t anticipate the possibility that past service would be credited, but I don’t think the answer is correct. The Schedule B instructions clearly state that you enter 100% on line 4 in the first year or if the RPA liability was $0 at the beginning of the prior year, neither is true in my example.

Does anyone think the employer would not need to make quarterlies in year 2, if the plan has a liability on the year 1 Schedule B?

[SoCalActuary]

Consider this line of argument:

In year one, the maximum accrual is 1/10 of 415 limit, which can all be considered earned in the current year. If the year one schedule b shows the beginning liability as zero, and the full current year accrual (up to the 1/10 415 limit) as the expected increase, then the first year valuation is 100% funded as of the beginning of the first year. This would produce zero quarterly contribution for year two.

[Effen]

Are you suggesting that the answer on 1(d)(2)(a) is always 0 in year one, even if the plan grants past service for benefit accruals?

[SoCalActuary]

I don't say "always", but I can see the argument for it, since there was no accrued benefit before the plan existed, and the current accrual is limited by the 1/10 415 limit.

[Effen]

Although I understand your arguement, I don't think it is correct. The Regs. permit you to accrue 1/10th of 415 limit at time 0, so in reality, you have a liability on the first day of the first year and $0 normal cost for year one.

I think a liability clearly exists on the first day of the year and therefore the Plan's funded ratio is 0% and therefore quarterlies would be due in year 2. I think the IRS response to ASPA question is wrong.

Since I generally don't design plans to credit past service, I was wondering how others who do handle quarterlies in year 2.