412(c)(8) amendment (or as redesignated, 412(d)(2))

[Belgarath]

Since there seems to be a tension between ERISA 204(h) and use of a 412©(8)/412(d)(2) amendment, I'd like to see what folks think. Let's say you have a 2007 calendar year DB plan. In January of 2008, client decides that he cannot afford the plan cost. So, you do a 412©(8) amendment, reducing the formula and recognizing the reduction for funding purposes for 2007.

Now, of course, you cannot reduce a benefit already accrued. No problem with that concept. My question is:

Is the EFFECTIVE date of the amendment 1-1-2007? If so, how do you reconcile this with the requirements of ERISA 204(h), which requires notice prior to the EFFECTIVE date of the amendment?

Or, do you make the effective date, say, February 15th of 2008, but RECOGNIZE it for 2007 for funding purposes?

204(h) language seems pretty clear, and following this the amendment couldn't be effective in 2007. The regs under IRC 11.412©-7 seem slightly less so, but seem to indicate that the effective date of the amendment itself must be effective in 2007.

How do y'all handle this? The common-sense approach, for me anyway, would be to have the effective date 1-1-2007, but this would contravene the plain language requirements of 204(h).

Grrrrrr!

[AndyH]

B, there is quite a bit of discussion of this topic from a post or two a few years back. My recall is that some opined that the amendment could be effective the prior 1/1 for purposes of 412 only. I didn't understand that then and I still don't but some of our regulars seemed to accept that. I'd suggest a search to that thread. Maybe our resident librarian WDIK has it indexed.

[John Feldt ERPA CPC QPA]

To clear that up, we place an extra clause in the amendment stating, in your example, "that for purposes of 412©(8) this amendment is effective 1/1/2007."

Also using your example, the rest of the amendment has an effective of 2-15-2008 as does the 204(h) notice.

I'm not a document attorney, so let's see what others have to say.

On edit, this is added: Section 412©(8) goes away in 2008, is that replaced with something in section 430, or does the whole concept mostly disappear since the funding method must consider benefits that accrue during the year anyway?

[SoCalActuary]

Since you bring up 2008, my pessimistic reading of PPA says that your fickle client will be stuck with the cost and must ask for a funding waiver if they can't afford it.

[John Feldt ERPA CPC QPA]

Yeah, that's what we thought too. Many of our DB clients will have some planning time since we use plan years that start a month or so before the company's fiscal year-end and we make sure they plan to take the first year cost as a deduction on the tax return in which the that first plan year started. That way, the second set of benefit accruals have not yet happened for a few months after the first plan year ends, but that second fiscal year has ended already, which gives them a pretty good feel for what they can afford business-wise. Worst case, they can usually freeze the plan before the cost of that next accrual occurs. Thoughts on that? (sorry to kinda hijack the discussion Belgarath)

[AndyH]

Yeah, that's what we thought too. Many of our DB clients will have some planning time since we use plan years that start a month or so before the company's fiscal year-end and we make sure they plan to take the first year cost as a deduction on the tax return in which the that first plan year started. That way, the second set of benefit accruals have not yet happened for a few months after the first plan year ends, but that second fiscal year has ended already, which gives them a pretty good feel for what they can afford business-wise. Worst case, they can usually freeze the plan before the cost of that next accrual occurs. Thoughts on that? (sorry to kinda hijack the discussion Belgarath)

So you don't prorate the normal cost in the year of freeze I take it? How do others feel about this for a beginning of year valuation? I'm inclined to think there may be a 50/50 split on this.

[Belgarath]

Hijacking is fine. No elevated terror alert on these boards!

SoCal - can you explain why that is? The same language is there under 412(d)(2). Is there something else in the actual calculation of cost that will effectively preclude use of it? (Sorry I need explanation, but I'm not an actuary, so the intricacies of calculating a DB cost are far beyond my capabilities.) Thanks!

[SoCalActuary]

Starting in 2008, we are stuck with a funding method that requires a normal cost covering the benefits earned (to-be-earned) in the plan year. Prior to that date, we can use projected funding methods that allow a lower future benefit that resulted from the amendment, even though the benefit was already earned during the year.