New 2006/2007 PPA Unfunded Current Liability Max Deduction

[Blinky the 3-eyed Fish]

404(a)(1)(D)(i) IN GENERAL. --In the case of any defined benefit plan, except as provided in regulations, the maximum amount deductible under the limitations of this paragraph shall not be less than the unfunded current liability determined under section 412(l) section 412(l)(8)(A), except that section 412(l)(8)(A) shall be applied for purposes of this clause by substituting '150 percent (140 percent in the case of a multiemployer plan) of current liability' for 'the current liability' in clause (i).

This paragraph shows the change in the law. The old rules determined the UCL at the EOY. I know this was clarified in Gray Book answers. Now the new rules specifically point to 412(l)(8)(A).

(A) Unfunded Current Liability

The term "unfunded current liability" means, with respect to any plan year, the excess (if any) of--

(i) the current liability under the plan, over

(ii) value of the plan's assets determined under subsection ©(2).

412(l)(8)(A) is clearly the current liability at the beginning of the year. On this alone, I would take that the new UCL calculation is based on beginning of the year current liability and ignoring the current liability normal cost.

However, being that the old rules referenced 412(l), which then referenced 412(l)©(8), and because the old rule was an EOY determination, I feel fairly confident the new rules are too an EOY determination.

Anyone disagree?

[Guest Steve C]

I read it as still on an EOY basis. The past use of an EOY calculation, I believe, arises from an IRS interpretation rather than Code language, and I don't see that the new law would affect that interpretation.

I've received informal agreement from IRS, but wouldn't put too much stock in that - they're still interpreting the law just as we are (well, maybe not exactly how we are).

[Blinky the 3-eyed Fish]

Thanks. I too agree the old rules were calculated based on IRS interpretation . What I don't like is the new specific reference to 412(l)(8)(A). I said I was fairly confident it was an EOY calculation. I want to be supremely confident.

[rcline46]

I would tend to thing it is a BOY calculation, since large plan valuations are REQUIRED to shift to BOY valuatons in 2008.

[Effen]

FWIW, we received the following statement from our valuation system vendor. They originally released an update doing a BOY calculation, but have changed their position and now believe it should be EOY.

‘The old 404(a)(1)(D)(i) says "In the case of any defined benefit plan... the maximum amount deductible under the limitations of this paragraph shall not be less than the unfunded current liability determined under section 412(l)." Then 412(l)(8)(A) defines "unfunded current liability" for purposes of subsection 412(l): It says that for "Purposes of this subsection"... "The term "unfunded current liability" means , with respect to any plan year, the excess (if any) of (i) the current liability under the plan, over (ii) value of the plan's asset determined under subsection ©(2)." which is the same subsection the new 404(a)(1)(D)(i) gets you to.

In other words, … the old and new rules both (in effect) point you to 412(l)(8)(A).

So … 404(a)(1)(D)(i) doesn't specify BOY or EOY. Gray Book guidance, however (in a bunch of references including 1993 Question 14 and 2004 Question 2) indicates that the unfunded current liability should be projected to the end of the year.’

[Blinky the 3-eyed Fish]

Rcline, I don't agree with the logic since this is a specific 2006 & 2007 rule. Also, it applies to all plans, not just over 100. Lastly, the 2008 rule includes the funding target normal cost in the calculation.

[david rigby]

I agree that it was, and still is, EOY. But the IRS has the last word, eventually.

[ak2ary]

I would be concerned about an assumption that PPA would allow a deduction of 150% of EOY CL. Beginning in 2008, the max deduction will be unfunded target liability at the beginning of the year, plus NC for the year, plus a cushion of 50% of target liability plus an anticipation of future salary increases. It is very clear that the 50% cushion is based on target liability at the beginning of the year. This issue was raised with the house and Senate many times and, apparently the current year normal cost was intentionally left out.

Now, the 150% of CL limit includes no adjustment for potential pay increases, if I remember correctly, so it is different and it may look to an EOY number, but I would hesitate to just assume that.

[Guest Jeff Hartmann]

I would be concerned about an assumption that PPA would allow a deduction of 150% of EOY CL. Beginning in 2008,

The actuaries in my study group generally agree we are using an EOY current liability, including the normal cost. A few are concerned about how the 2008 law differs, but in my opinion the 2006-2007 transition rules are meant to pretty much continue doing things the way we did in 2004-2005 (with a couple of exceptions that are clearly stated in PPA). 2008 is a whole new ball game and I don't think there is any intention to apply 2006-07 transition rules in a similar way to 2008+ rules.

It is also my opinion that the deduction was increased to 150% to encourage additional funding during these two years to help plans get better funded and to make up for the fact that the enhanced funding from the permanent rules don't take effect for 2 years. Giving us 150% of the normal cost would be consistent with this goal.

[ak2ary]

I spoke with B. Graff about this issue and he called Judy Miller to discuss the intent in changing the citation for CL. The intention, he was assured was to increase the deduction limit and there was never any intention to change the definition of CL used to calculate the max deduction. Thus, its an EOY number