AFTAP, Restrictions, EOY Vals, Plans < 5 Yrs. Old

[Penman2006]

I have many small DB plans that currently have an EOY val date. Many are DB/DC combinations and for that reason I like an EOY val date because I can do everything at once. Under normal circumstances a number of these plans would not have the 12/31/07 val completed by 4/1/08. Forgetting about the range certification for this discussion, my understanding is that at 4/1/08, without the 2007 results, the AFTAP would be considered less than 60% and the applicable restrictions would apply. Virtually all of these plans are less than 5 years old so the restriction would be limited to not making accelerated distribution payments (lump sums). Most of these plans are small and would not be making lump sum payments during that period anyway. Most of these plans will be 100% funded when certified. My understanding is that the restriction would apply until the 2007 val is completed and the 2007 AFTAP is certified (based on the 2007 results minus 10%). My understanding is that although a plan may be restricted from making lump sum payments, no amendments or notices are required. (A notice would be required if a benefit freeze applied.) If all of the above is true, for these well funded small plans that are less than 5 years old, on a practical level I don't see that there is any concern if the 12/31/07 val is not completed by 4/1/08 and therefore the restriction on accelerated payments applies (for a few months). If that's the case then for the clients that can't or won't get me the 12/31/07 val data before 4/1/08 I don't have to worry about switching to a 2007 BOY val or doing a 2008 range certification in order to have a certification done by 4/1/08.

I would appreciate some feedback with respect to the above. Right, wrong, pitfalls?

IF the above were correct, then taking it a step further:

Unless there is a change in the current law to accomodate EOY vals I will need to do a 1/1/08 BOY val so that I could get the 2008 AFTAP completed by 10/1/08. Otherwise, if the 2008 val isn't completed by 10/1/08 the plan will again be considered less than 60% funded until the 2008 val is completed. But if the plan is under 5 years old that might not be so bad and I could stick with a 12/31/08 EOY val. Just let the plan go below 60% from 10/1/08 until the 12/31/08 val is completed, say that's 7/1/09, then if any lump sums are payable, pay them between 7/1/09 and 10/1/09 (assuming the certification shows 80%+).

Could this be a strategy for:

A. Keeping life simple

B. Getting dis-enrolled and sued into the poorhouse

C. Neither A. or B. but at least a good long BenefitsLink posting

[Andy the Actuary]

There are three choices:

(1) IRS relief is forthcoming

(2) IRS relief is not forthcoming

(3) You will not be able to understand or apply the IRS relief

What do you do after 5 years?

It's always been apparent that small plans are around for the ride and must go where the driver takes them. Else, why would you have to employ a yield curve rather than a single interest rate for small plans? (2) above may be the IRS response -- the IRS has been aware of the retrospective valuation issue since day one and has chosen not to address it.

[JAY21]

Penman, in my opinion I think you are on the right track. I've been mulling over just which ones (small plans) I really feel need to switch to BOY vals on (maybe those with a few more NHCEs that tend to squawk and irrate clients if lump sums not immediately available) and those I can just let it ride keeping EOY vals where the practical impact on any restrictions are limited for reasons you have stated.

ASPPA has a conference in CA later this month, I thought I'd see what ideas I can glean from that and still have time to decide before 4/1/08 what exactly I'm going to do and whether it's a blanket approach on small plans or some kind of case-by-case basis. I'm also interested in other's thoughts.

[Penman2006]

Thanks for your feedback Jay. I was hoping this would generate a few more responses.

[tymesup]

Thanks for your feedback Jay. I was hoping this would generate a few more responses.

I wish I could give a better response. I keep hoping for EOY guidance, but don't see anything in the 430 proposed regs (http://benefitslink.com/taxregs/REG-139236-07.pdf).

I know the clients expect to receive lump sums; certainly that's what they were sold. We were already juggling timing for folks with 415 issues and/or pending IRS submissions. Now we have to worry about 436 restrictions.

Now add the initial 5 year safe harbor - somebody's definitely going to get tripped up by assuming it applies when it doesn't. Or some client will ask, why did my buddy get to take a lump sum and I can't?

Note that it would be simple to give EOY relief. The Senate bill passed at the end of 2007 provided for Treasury to write such rules, so perhaps this will be resolved, eventually.

[Guest merlin]

We were thinking of the "BOY val date for certification, EOY val date for costing" approach too, but I think the propsed 430 regs kill it. The AFTAP is defined in terms of assets and funding target, and the regs say that the determination of the assets and the funding target is made as of the valuation date.

Maybe something better will come out of the LA conference.

Any thoughts from anyone else?

[Penman2006]

I think that for the small plans that I have that are less than 5 years old the certification timing is mostly a non-issue. I'll do an EOY val and and EOY certification because it just won't matter that lump sums get restricted for a period of time. If for some unusual reason the lump sum restriction did matter at some point, the termination of a key individual for example, then it may be necessary to switch to a BOY val and do the certification for that particular plan so that the distribution would be allowed.

For plans that are over 5 years old and are not already frozen then I don't think there is a way around switching to a BOY val in order to get the certification done and avoid a freeze (assuming the plans are adequately funded). For those plans that are currently EOY vals, I am really pushing for the 12/31/07 data so that I can do the 12/31/07 val before 4/1/08. If I can't get the data I may have to switch to a 2007 BOY val. If I can do a 2007 EOY val though, if there are no changes to the current law, I guess I'll have to do a 1/1/08 val before 10/1/08 so I can do the 2008 certification.

This represents my current thinking. I am definitely interested in feedback.

BTW, is there any model certification language by the IRS, or just floating around?

[JAY21]

Penman, for what little it is worth I'm basically thinking along the same lines as you are. Switching to a BOY val mostly when practically necessary, not en masse. I'm also hoping the LA conference might bring some new info and hope for EOY vals, and if so, those of us going will share what we glean.

[Penman2006]

Good, thanks.

[Guest merlin]

Did anything come out of the LA Conference?

[WDIK]

Nothing official, but in my opinion, Jim Holland all but verified that there will be a solution for the small DB EOY situation available "soon".

[JAY21]

I can't remember if it was the LA pre-conference session, or regular session, but Jim Holland mentioned one "might" consider using the 12/31/06 valuation numbers for a 2007 AFTAP given a lack of current guidance for EOY vals. That was informal of course, but I kind of got the impression that may the direction the future IRS guidance would take. For 2008 AFTAP and future years, he repeated that it will take a technical correction bill to provide relief. He said the IRS has more leeway in pre-2008 years, than 2008 and thereafter, so I get the impression we won't be out of the woods yet even after the IRS relief/guidance, which to me sounded like it might only apply to the 2007 AFTAP.

Despite the IRS officials speaking in several sessions I didn't feel they gave us much info. Most of their remarks seemed to fall into the typical categories: (1) "we realize there is an issue", (2) "that's on our list to address this year", (3) "guidance will be out relatively soon we but can't define soon", or (4) "That's an issue for Congress to take up".

The above comment on the 12/31/06 valuation was about the only "unofficial" suggestion I heard. On about everything else they seemed to play it very close to the vest. Overall I was disappointed with the conference content, even though the facilities and logistics were great. Even Larry D's presentation with Jim Holland on indexed benefits in a DB plan seemed to me to be a painfully narrow topic that I don't think many people were interested in given the number of people leaving the session regularly.

[WDIK]

I believe it was the pre-conference session.

I interpreted Mr. Holland's "might" statement as a foreshadowing of the guidance that will be issued. Perhaps I was being too optimistic.

(I agree with your sentiments about the general lack of information provided during the conference, and I was also quite disappointed with the session on indexed plans.)

[Penman2006]

Thanks for taking the time to share that info.

Jay, regarding my earlier post detailing my considered "strategy" for dealing with plans that are less than 5 years old and currently EOY valuations, one thing I missed is that a participant notice is still required if the restriction on accelerated payments applies. So, contrary to my original thinking, letting the plans be deemed less than 60% funded does have a consequence.....the participant notice. Correct me if I'm wrong but no model notice has been issued. Maybe the notice for a deemed underfunded plan can say "in reality your plan is 100% funded but the IRS is making us tell you it's less than 60% funded". Nice.

[david rigby]

Despite the IRS officials speaking in several sessions I didn't feel they gave us much info. Most of their remarks seemed to fall into the typical categories: (1) "we realize there is an issue", (2) "that's on our list to address this year", (3) "guidance will be out relatively soon we but can't define soon", or (4) "That's an issue for Congress to take up".

Similar to every other conference.

[JAY21]

Penman, thanks for the notice reminder. I didn't hear anything about any model notice and I'm pretty sure one does not exist at this point. What, if any, are the penalties for failing to provide the notice if a notice isn't done ? Anyone ?

[Penman2006]

I read some conference session outline that said up to $1,000 per day, but I have not tried to verify that.

[ak2ary]

EOY vals may use the 12/31/06 valuation results for the 1/01/07 AFTAP

See Notice 2008-21 attached

Notice_2008_21.pdf

[JAY21]

Thanks Ak2ary. Now back to some of the practical decisions that Penman mentioned.

So, if we calc the 2007 AFTAP before April 1, 2008, using EOY vals under this notice approach (use 12/31/06 val/assets), then it's a good % until April 1, 2008 and after that it drops 10% until the earlier of (a) 2008 AFTAP is done, or (b) 10/1/2008 at which time if no 2008 AFTAP it's deemed to be less than 60%. Is that right ?

I'm still not clear if there is any penalty if no 2007 AFTAP certification is done by April 1, 2008. If we can live with benefit restrictions, amendment restrictions, UPCE restrictions, etc.. for 2008 do we care ? We care if there is a penalty or if the client cares of course for other reasons, but like Penman I'm still trying to figure if there is motivation to do it (2007 AFTAP) if client doesn't need it for lump sums, UPCEs, amendments.

Any thoughts ?

[ak2ary]

For a newer plan, it is simply the restriction on accelerated benefit payments and notices to participants etc...

If the plan is well funded as of 12/31/06, it seems that the simplest method is to provide a 2007 AFTAP certification

This will get you to 10/1, by which time you will have done your 12/31/07 val and , assuming tech corrections by then, could certify 2007

If the plan is well funded it seems silly to consider not certifying...

[Penman2006]

I agree. Now that we can use the 12/31/06 val results for the 2007 AFTAP certification there does not seem to be any reason to not have a certification in place by 4/1/08. Let's hope final regs allow the 12/31/07 AFTAP certification to apply for the entire 2008 plan year as mentioned in the Notice (using 2008 as an example). That would be a practical solution and very welcome relief as far as I'm concerned.