404 Limit under PPA

[zimbo]

We are setting up a new maximized DB plan for 2008 for a 1 life situation. When I use a common plan design to maximize (10% x yrs. of participation up to 10), both my minimum and maximum is the Normal Cost under PPA. This is lower than desired.

Since there is no accrued benefit as of 1/1/2008, there is no Target liability to apply the 50% cushion to, therefore the maximum 404 calculation will not apply.

We are proposing changing the formula to be based upon years of service so that as of 1/1/2008 the AB would be 1/10 of the dollar limit under 415 (the participant has much past service and high average earnings). Of course, the AB on 12/31/2008 would remain unchanged. In this scenario, we get $0 as a normal cost and the 430 minimum is basically the 7 year amortization of the Target Liability. However the 404 maximum can equal the unfunded target liability including the 50% cushion amount (which is similar to the old 150% of CL concept with, of course, different assumptions due to PPA).

Is this a proper reading of 404 under PPA in order to maximize contributions in the first plan year?

[ak2ary]

That is the common thought process on this. The IRS hasn't really given any guidance on it at this point, however. IMHO its the logical approach and for alot of different reasons, makes the most sense

[Mike Preston]

zimbo, zimbo, zimbo.......

[ak2ary]

That is the common thought process on this. The IRS hasn't really given any guidance on it at this point, however. IMHO its the logical approach and for alot of different reasons, makes the most sense

But until we get some guidance we are in limbo, zimbo

[Jim Norman]

What about setting up the plan on a 7/1/07 - 6/30/08 Plan Year (or 10/1/07 - 9/30/08 for that matter.) You are doing an 07 PY val, so have 150% CL available. Employer elects to take the deduction for the PY ending in the taxable year per 1.404(a)-14©, which also provides the authority to use the plan year to determine the deductible limit for the taxable year.

[zimbo]

I appreciate the comments and insight.

Also, I seem to have done the impossible: Rendered Mike Preston speechless....all that is left is a trail of Zimbos.

[Mike Preston]

uh....uh.....uh..........uh.............

[Guest KennyH]

We are setting up a new maximized DB plan for 2008 for a 1 life situation. When I use a common plan design to maximize (10% x yrs. of participation up to 10), both my minimum and maximum is the Normal Cost under PPA. This is lower than desired.

Since there is no accrued benefit as of 1/1/2008, there is no Target liability to apply the 50% cushion to, therefore the maximum 404 calculation will not apply.

We are proposing changing the formula to be based upon years of service so that as of 1/1/2008 the AB would be 1/10 of the dollar limit under 415 (the participant has much past service and high average earnings). Of course, the AB on 12/31/2008 would remain unchanged. In this scenario, we get $0 as a normal cost and the 430 minimum is basically the 7 year amortization of the Target Liability. However the 404 maximum can equal the unfunded target liability including the 50% cushion amount (which is similar to the old 150% of CL concept with, of course, different assumptions due to PPA).

Is this a proper reading of 404 under PPA in order to maximize contributions in the first plan year?

I agree that this likely provides the largest max bc you get to use the cushion (although I understand that may be moot based on the technical corrections bill) I disagree that your min and max would be the same under either situation. Unless I missed something, your max will be based on the at-risk liability (even if your plan is not at risk) and NC which assumes an earlier retirement date than your TNC should and results in a higher NC and thus an amount larger than the min.

[zimbo]

I thought the at risk assumptions were only for plans with greater than 500 participants? This example is for a small plan, in this case a 1 life plan.

[Guest KennyH]

At-risk rules do not apply for minimum funding purposes. However, there is no such restriction when calculating the max.

404(o)(2)(B) SPECIAL RULE FOR CERTAIN EMPLOYERS. --If section 430(i) does not apply to a plan for a plan year, the amount determined under subparagraph (A)(i) for the plan year shall in no event be less than the sum of --

(i) the funding target for the plan year (determined as if section 430(i) applied to the plan), plus

(ii) the target normal cost for the plan year (as so determined).

Note that the higlighted section does not specifiy why 430(i) does not apply, just simply that it does not apply for this plan year.

[FAPInJax]

I have an additional question. A plan amends the formula to increase benefits as of 1/1/2008. It appears that the target liability and normal cost can include the amendment for funding BUT the cushion amount for the maximum may not include the amendment for the HCEs. Is my interpretation correct (subject to IRS regulations which will be forthcoming shortly <GG>)??

[Guest KennyH]

That is my understanding. However, we have also taken the positon that plan inception (like this case for a new plan at 1/1/2008) is not considered a plan amendment for that situation (or for the unfunded CL max pre-PPA).