Reconciliation Account

[Guest Texas_Acty]

Is it eliminated only when the ERISA full funding limit applies?

Eliminated when either the ERISA FFL or the RPA 90% override FFL applies?

There are several Gray Book questions that address the elimination of the amortization bases when a FFL applies (bases are eliminated when either ERISA or RPA override applies). Only one GB question addresses the elimination of the RA, and suggests that it is eliminated only when the ERISA limit applies.

If the RPA 90% override FFL applies, and the amortization bases are eliminated for the following year but the RA remains because it is not eliminated (because the ERISA FFL did not apply), then the Rev Ruling 81-213 "experience loss" base would need to be established as

Credit Balance + Reconciliation Account + Unfunded Liability (limit 0).

Critiques?

[david rigby]

I can't say it better than Gray Book 94-7:

Disposition of Reconciliation Account Balance - 412

Can any of the components comprising the Schedule B Reconciliation account ever be eliminated and, if so, under what circumstances? For example, if a plan becomes fully funded for Current Liabilities, can the accumulated additional funding charges due to section 412(l) (Schedule B item 9(p)(i)) be transferred to the plan's credit balance? Similarly, can any or all of the Reconciliation account be eliminated or transferred to the credit balance when the 412©(7) full funding limit applies?

RESPONSE:

The reconciliation account should be eliminated only when the ERISA full funding limit applies and there is a full funding credit. In no event should the reconciliation account be added to the credit balance.

Copyright © 1994, Enrolled Actuaries Meeting

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[Guest Texas_Acty]

I can't say it better than Gray Book 94-7:

Disposition of Reconciliation Account Balance - 412

Can any of the components comprising the Schedule B Reconciliation account ever be eliminated and, if so, under what circumstances? For example, if a plan becomes fully funded for Current Liabilities, can the accumulated additional funding charges due to section 412(l) (Schedule B item 9(p)(i)) be transferred to the plan's credit balance? Similarly, can any or all of the Reconciliation account be eliminated or transferred to the credit balance when the 412©(7) full funding limit applies?

RESPONSE:

The reconciliation account should be eliminated only when the ERISA full funding limit applies and there is a full funding credit. In no event should the reconciliation account be added to the credit balance.

Copyright © 1994, Enrolled Actuaries Meeting

Yeah, GB 94-7 says something pretty well. In fact, 94-7 was the first piece of guidance I reviewed. But 94-7 was issued relatively early in the tenure of the RPA CL FFL rules. Subsequent Q&As and other stuff seems not to be consistent with 94-7 (e.g., Eliminate the bases when the RPA 90% override applies, but leave the reconciliation account? That seems to be nonsensical.)

I was hoping that someone could provide some insight about how 94-7 fits with the other Q&As and other formal guidance about elimination of bases and such, rather than just simply regurgitate verbatim something I had already considered. But thanks anyway!

[Guest Steve C]

What other Q&A's are you looking at? I've seen 96-4, which seems consistent with 94-7 despite slightly different language.

Here's the response from 96-4:

"In general, FSA bases are eliminated when the Schedule B actually shows a full funding credit on line 9(l)(4) (i.e., when funding reaches the greater of 100% of the actuarial accrued liability and the RPA '94 override of 90% of current liability)."

Remember that the RPA Override simply places a floor value on the FFL, limiting the circumstances in which an FFL credit will be shown on the Sched B. You may now have a situation where the (original) ERISA FFL would have applied and yet no FFL credit arises. In this case your amortization bases, and your Reconciliation Account, remain in place.

When you use the phrase "the RPA 90% override FFL applies," if you mean that there is an FFL Credit, then the ERISA FFL must also apply.

[Guest Texas_Acty]

What other Q&A's are you looking at? I've seen 96-4, which seems consistent with 94-7 despite slightly different language.

I was mainly referring to 96-4. The others are 99-1 and 03-3, but they do not have anything pertinent to the issue at hand that I recall.

I initially disagreed with your assertion that 96-4 seems consistent with 94-7; my problem was that they seemed to be inconsistent with one another, otherwise I probably would not have needed to post a query. Please read on first.

Remember that the RPA Override simply places a floor value on the FFL, limiting the circumstances in which an FFL credit will be shown on the Sched B. You may now have a situation where the (original) ERISA FFL would have applied and yet no FFL credit arises. In this case your amortization bases, and your Reconciliation Account, remain in place.

In my situation, the ERISA FFL would have applied with a full funding credit of, say $175K. Instead the RPA override FFL is larger than the ERISA FFL but still smaller than the accumulated funding deficiency. Thus, there is a full funding credit due to the RPA override of, say, $100K, smaller than the ERISA FFC would have been. The guidance I got from my initial reading of 94-7 and 96-4 was that the amortization bases are eliminated due to the FFC (RPA-$100K, ERISA-$0) (96-4), but that the reconciliation account remains because it is eliminated "only when the ERISA full funding limit applies and there is a full funding credit." (94-7) That is what sounded to me to be inconsistent, and perplexing.

When you use the phrase "the RPA 90% override FFL applies," if you mean that there is an FFL Credit, then the ERISA FFL must also apply.

Is it your interpretation is that the ERISA FFL "applies" because it is also lower than the AFC, and would have created a FFC if not for the larger RPA override? If so, then I understand how you could have found 94-7 and 96-4 consistent with one another. Moreoever, a careful reading of 94-7 supports this. I just wish the answerer of Q&A 94-7 could have been a little clearer.

I appreciate your responding to this. I owe you one.

[Guest Steve C]

It might help if we roll the clock back a few years.

Prior to 1988, we had only the ERISA FFL. Life was simple. Relatively simple. The FFL Credit was based on the ERISA FFL, which also dictated elimination of amortization bases.

Starting in 1988, the FFL Credit was based on the lesser of the ERISA FFL and the OBRA '87 FFL. You could then have an FFL Credit without elimination of bases, since the ERISA FFL might not have applied. (this may help explain the language used in the 94-7 response)

The RPA '94 Override FFL came into play in 1995. The FFL Credit was then based on the lesser of the ERISA FFL and OBRA FFL, but not less than the RPA Override. You could still have an FFL Credit without elimination of bases.

The OBRA FFL has now been eliminated. Since 2004 the FFL Credit has been based on just the greater of the ERISA FFL and the RPA Override; the same measure also dictates the survival of amorization bases (and ARA).

We were once forced to split the FFLC (the 9(l)(4) reference in 96-4 is referring to FFLC before OBRA FFL), but no longer. In your example, I wouldn't distinguish between an RPA FFLC of $100K and an ERISA FFLC of zero. I'd simple consider it as an FFL Credit of $100K (call it an ERISA FFL Credit if you like), which eliminates amortization bases and any Reconciliation Account balance.

Hopefully this helps.

[david rigby]

Steve C is correct. The existence of OBRA FFC did not eliminate bases. IMHO, Q&A 94-7 is correct and sufficient.