Interest on credit balance for quarterly contribution requirement

[dmb]

Calculating quartlerly contribution penalty for 2006 calendar year plan. Contribution of $50,000 made on 4/1/06 for the 2005 funding standard account. For the 4/15/06 quarterly requirement, it is my understanding that the contribution made on 4/1/06 receives interest from 4/1/06 and not 12/31/05 even though it is part of the 12/31/05 credit balance and made before the 4/15/06 quarterly due date. Am i thinking correctly or not?? Thanks.

[Guest Texas_Acty]

Contribution of $50,000 made on 4/1/06 for the 2005 funding standard account. For the 4/15/06 quarterly requirement, it is my understanding that the contribution made on 4/1/06 receives interest from 4/1/06 and not 12/31/05 even though it is part of the 12/31/05 credit balance and made before the 4/15/06 quarterly due date. Am i thinking correctly or not?? Thanks.

Interest on the 4/1/06 payment should be calculated from 12/31/05 for purposes of determining the available credit balance on 4/15/06, since it would be considered as paid as of 12/31/05. For purposes of determining the penalty interest, the 1/15/06 to 4/1/06 period should be used. (Or other periods/amounts, if the plan was in arrears by more than the 1/15/06 payment.)

[david rigby]

I agree. Also see Gray Book 02-9

Funding: Quarterly Contributions and Application of Credit Balance

Plan A has a calendar-year plan year. For 2001, Plan A makes the entire minimum contribution on December 31, 2001. The resulting credit balance on that date is exactly zero. For 2002, Plan A owes a quarterly contribution of $50,000 each quarter. Plan A makes the first two contributions of $50,000 each on April 15, 2002 and July 15, 2002. If these were classified as 2002 contributions (on the 2002 Schedule B), they would exactly satisfy the first two quarterly

contribution requirements.

However, suppose the actuary reports these two contributions on the 2001 Schedule B as 2001 plan year contributions. Plan A will now report a $100,000 credit balance as of December 31, 2001, which can be used to satisfy the first two quarterly contributions for 2002. In particular, under Q&A-12 of Notice 89-52, the credit balance and interest thereon can be used to satisfy subsequent quarterly contributions once the prior year contributions have been made to generate the credit balance. What is the next quarterly contribution amount due on October 15, 2002, assuming a valuation interest rate of 8%?

RESPONSE

$46,651. On April 15, 2002, per Notice 89-52, contributions for the prior plan year made by that date can be reflected in the credit balance. Therefore, on April 15, 2002, Plan A has a $50,000 credit balance, effective December 31, 2001. This credit balance is increased with interest to $51,135 on April 15, 2002, and $50,000 of it is used to satisfy the quarterly due. On July 15, 2002, another $50,000 worth of credit balance is created, effective December 31, 2001. This credit balance is increased with interest to $52,128 on July 15, 2002, and $50,000 is used to satisfy the quarterly due. The remaining credit balances of $1,135 on April 15, 2002 and $2,128 on July 15, 2002 are increased with interest to $3,349 on October 15, 2002. Therefore, Plan A must deposit only an additional $46,651 on October 15, 2002 to satisfy the next quarterly due.

Copyright © 2002, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

[Andy the Actuary]

I agree. Also see Gray Book 02-9

Funding: Quarterly Contributions and Application of Credit Balance

Plan A has a calendar-year plan year. For 2001, Plan A makes the entire minimum contribution on December 31, 2001. The resulting credit balance on that date is exactly zero. For 2002, Plan A owes a quarterly contribution of $50,000 each quarter. Plan A makes the first two contributions of $50,000 each on April 15, 2002 and July 15, 2002. If these were classified as 2002 contributions (on the 2002 Schedule B), they would exactly satisfy the first two quarterly

contribution requirements.

However, suppose the actuary reports these two contributions on the 2001 Schedule B as 2001 plan year contributions. Plan A will now report a $100,000 credit balance as of December 31, 2001, which can be used to satisfy the first two quarterly contributions for 2002. In particular, under Q&A-12 of Notice 89-52, the credit balance and interest thereon can be used to satisfy subsequent quarterly contributions once the prior year contributions have been made to generate the credit balance. What is the next quarterly contribution amount due on October 15, 2002, assuming a valuation interest rate of 8%?

RESPONSE

$46,651. On April 15, 2002, per Notice 89-52, contributions for the prior plan year made by that date can be reflected in the credit balance. Therefore, on April 15, 2002, Plan A has a $50,000 credit balance, effective December 31, 2001. This credit balance is increased with interest to $51,135 on April 15, 2002, and $50,000 of it is used to satisfy the quarterly due. On July 15, 2002, another $50,000 worth of credit balance is created, effective December 31, 2001. This credit balance is increased with interest to $52,128 on July 15, 2002, and $50,000 is used to satisfy the quarterly due. The remaining credit balances of $1,135 on April 15, 2002 and $2,128 on July 15, 2002 are increased with interest to $3,349 on October 15, 2002. Therefore, Plan A must deposit only an additional $46,651 on October 15, 2002 to satisfy the next quarterly due.

Copyright © 2002, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

So, does this mean that when you complete Schedule B, you credit a full year's interest on the 12/31/2001 credit balance (which includes the two $50,000 accrued contributions) or that the interest reported on Schedule B is the sum of the interest segments up until the quarterly contributions are due. Would the answer be the same if instead of accrued contributions, the $100,000 was made on 12/31/2001?

[Mike Preston]

So, does this mean that when you complete Schedule B, you credit a full year's interest on the 12/31/2001 credit balance (which includes the two $50,000 accrued contributions) or that the interest reported on Schedule B is the sum of the interest segments up until the quarterly contributions are due.

The former.

Would the answer be the same if instead of accrued contributions, the $100,000 was made on 12/31/2001?

Yes.