New deductibility limit in 2008 - New Plan

[mwyatt]

My understanding of the upper cap on the maximum deductible limit is the greater of:

Funding Target (representing the BOY accrued benefit valued using the 430 assumptions), plus

Target Normal Cost (representing amount of benefit accruing during the year using 430 assumptions), plus

the "Cushion Amount", equal to 50% of Funding Target plus amount of increase in Funding Target if calculated using projected, rather than current, average salary; all reduced by fair value of assets, and

the 430 minimum deductible contribution.

Am I correct that if I have a new plan in 2008 w/ no past service benefit, that the minimum and maximum would be identical (since cushion amount does not reference the benefit accruing during the year).

This seems a little anomolous to me. What if I had a benefit formula wherein I had a past service benefit equal to 1/10th of the 415 limit which immediately credits on effective date. So Funding Target equals 1/10th of limit, Target Normal Cost is $0. So in effect I could have a maximum deductible contribution equal to 150% of the Funding Target. Contrast this with a benefit that just provides 1/10th of 415 limit during 1st year. Now my maximum deductible is just the Target Normal Cost (which equals the Funding Target). Do I have this straight?

Have seen the recent 430 proposed regs released on 12/31/2007, but don't see anything out yet on 404 based on the IRS PPA website dealing with the 404 calc (other than RR 2007-67). Anyone else know of guidance on the max deductible contribution in the works?

[Andy the Actuary]

My understanding of the upper cap on the maximum deductible limit is the greater of:

Funding Target (representing the BOY accrued benefit valued using the 430 assumptions), plus

Target Normal Cost (representing amount of benefit accruing during the year using 430 assumptions), plus

the "Cushion Amount", equal to 50% of Funding Target plus amount of increase in Funding Target if calculated using projected, rather than current, average salary; all reduced by fair value of assets, and

the 430 minimum deductible contribution.

Am I correct that if I have a new plan in 2008 w/ no past service benefit, that the minimum and maximum would be identical (since cushion amount does not reference the benefit accruing during the year).

This seems a little anomolous to me. What if I had a benefit formula wherein I had a past service benefit equal to 1/10th of the 415 limit which immediately credits on effective date. So Funding Target equals 1/10th of limit, Target Normal Cost is $0. So in effect I could have a maximum deductible contribution equal to 150% of the Funding Target. Contrast this with a benefit that just provides 1/10th of 415 limit during 1st year. Now my maximum deductible is just the Target Normal Cost (which equals the Funding Target). Do I have this straight?

Have seen the recent 430 proposed regs released on 12/31/2007, but don't see anything out yet on 404 based on the IRS PPA website dealing with the 404 calc (other than RR 2007-67). Anyone else know of guidance on the max deductible contribution in the works?

This was posted awhile ago but it appears to infer that the "cushion" amount applies to all DB plans (e.g., under 500 participants) and not just to those "at risk." This appears to be what 404 says but seems contrary to what appears in print. I.e., the cushion amount applies to "at risk" plans only. Any thoughts or clarifications on this?

[mwyatt]

Andy, looking at 404(o)(2)(B), this seems to me to read that if your plan is not "at risk" (which by definition would include any plan under 500 lives), that you get a special floor on the maximum deductible amount equal to the FT and TNC determined using the at risk assumptions less the value of assets.

There are mods for small plans under (o)(4) (under 100 lives) where you have to modify your HCE Funding Target for cushion purposes only by undoing effects of amendments including COLA increases that occurred in the prior 2 years.

Still some open questions:

1) Looks to me that there is no adjustment for interest for the plan year (i.e., max deductible amount is based on BOY numbers rather than as in past practice where you increased at FSA rate to end of year). Now that I think of it, would seem that an EOY valuation in this situation would have a larger maximum deductible amount than a BOY valuation, which seems an unintended consequence.

2) Still have the issue up in the air w/ the Technical Corrections Bill of cushion amount also applying to the TNC.

[Andy the Actuary]

Thank you. I'm in your choir. Simply, some of the materials I read suggest otherwise. For example, the early CCH book "New Law Explained" indicates (paragraph 705) that "The [maximum deductible] computation for plans that are not at-risk essentially removes the cushion amount from the limitation alternative." I suspect this early effort was just plain off-base. I've seen this interpretation elsewhere as well. Nonetheless, . . .

[ak2ary]

mwyatt, i agree with your interpretation of 404(o)...if only someone from the IRS would say that they also agree with us..but they won't..I have seen IRS reps asked this question at the EA meeting; at the advanced actuarial conference; at the Northeast benefits conference and at several smaller meetings...their response is consistent "we haven't issued any guidance under 404(o) at this time and I cannot confirm that the 404(o) deduction limit of unfunded at risk target liabilit plus unfunded at risk target normal cost applies to a plan not subject to the at-risk rules.

So they are not saying its not the case but they are not saying you can deduct it. One consolation is that 404(o) regs cant possibly be effective for 2008, so you must go by a reasonable interpretation of the statute. Some people believe that following the plain language of the statute is reasonable

It should be noted that adding the TNC to the cushion amount is NOT in the technical correction bill currently being considered altho it has been in other versions

[Guest lerieleech]

Yes, I was just looking over the Technical Corrections bill that was passed by the House, and saw that it did not include a provision to include 50% of the funding target normal cost in the cushion amount. I find this to be very disappointing.

[tymesup]

"the "Cushion Amount", equal to 50% of Funding Target plus amount of increase in Funding Target if calculated using projected, rather than current, average salary"

A participant who can ride up a salary scale can get a fair amount of cushion under the second part above. This hasn't gotten a lot of attention on the various actuarial boards.

"1) Looks to me that there is no adjustment for interest for the plan year (i.e., max deductible amount is based on BOY numbers rather than as in past practice where you increased at FSA rate to end of year). Now that I think of it, would seem that an EOY valuation in this situation would have a larger maximum deductible amount than a BOY valuation, which seems an unintended consequence."

The adjustment for interest doesn't appear to be in the old 404. It's in reg 1.404(a)-14(f)(13). It seems reasonable to assume this reg applies to new 404. I raised this issue elsewhere:

http://www.actuarialoutpost.com/actuarial_...ad.php?t=141048