404(a)(1)(A)(ii) (5 year amortization)

[YankeeFan]

We use Relius Administration version 11.1.2 as our valuation software. The software give you an option to apply IRC 404(a)(1)(A)(ii) for purposes of calculating the maximum contribution. When this option is selected, if any three individuals together have more than 50 percent of the total unfunded cost for the plan, then their unfunded costs will be amortized over at least 5 years.

I'm curious why the software give you an option to apply IRC 404(a)(1)(A)(ii). I wasn't aware that this regulation is optional. Are there circumstances when the regulation is not applicable?

Obviously, in many cases the maximum deduction using IRC 404(a)(1)(d) (150% limitation) is greater than the normal cost applying IRC 404(a)(1)(A)(ii). As such, my question would be irrelevant.

However, in situations where the maximum deduction using IRC 404(a)(1)(d) is not available (i.e., new plan), must you apply IRC 404(a)(1)(A)(ii)? I think the answer is yes but why does Relius give you an option?

[rcline46]

My experience with relius is that it wants to apply the rule EVEN IF the person(s) in question have been participants for many years.

Also, it can create severe underfunding in small plans restricting the lump sum payment at normal retirement. It is a bad regulation.

[FAPInJax]

The reason for the option is that many actuaries do not believe that the code section applies. The option was available in the prior system and therefore was offered as an option in Relius.

Note that the default choice is for the code section to apply and that several messages appear on reports if it is overridden and turned off.