Funding for Termination liability

[dmb]

A non-profit client asked about funding the plan on a plan termination basis rather than on an ongoing basis using long term assumptions. I thought there was a reg or rev rul or rev proc about not allowing funding on a termination basis, but i can't find it. Does anyone have a cite??? Thanks.

[Effen]

hugh? Funding db plans on termination assumptions is exactly what PPA is forcing ALL plans to do. Not sure why you would think that would be a problem.

[dmb]

I realize what PPA is doing, however, i am refering to pre-PPA. Is there a cite that might mention why it would have been unreasonable to use, for example 30 year treas rates as interest assumptions for valuation purposes.

hugh? Funding db plans on termination assumptions is exactly what PPA is forcing ALL plans to do. Not sure why you would think that would be a problem.

[AndyH]

You might find something relevant by looking for discussion of the IRS audit program from 15 or so years ago, where they were auditing the 5% interest plans (as well as low NRAs). If there was a cite, they would have laid it out.

[Effen]

Again, why do you think funding the plan on a termination basis would be bad? The plan will ultimately terminate, so what could be wrong with it?

Although AndyH is correct that during the late 80s the IRS was attacking funding assumptions of 5% and retirement ages of 55, but that was at a time when interest rates were near 10%. They also lost many of those cases. At that time the gov. was all about taking tax deductions away in order to raise revenue. It is not the world we live in today.

[SoCalActuary]

The actuary has every right to use the 30 yr treasury rate and termination mortality assumptions for funding assumptions. If he/she is uncomfortable with these assumptions, there are plenty of other actuaries who are very comfortable and willing to take the assignment.

Further, a traditional unit credit funding method and the new 2006-07 PPA rules allow deductions to the 100% CL limit. A low end interest rate for CL is still higher than the 417e interest rate, but it gets you close to the same result.

However, if the plan has a final pay benefit component, then you have to worry about the adequacy of a traditional unit credit method, and should consider a projected unit credit method.