AFTAP Presumption Question

[Penman2006]

I have an calendar year ongoing plan with a beginning of year val date. Plan benefits were frozen in 2006. The 1/1/07 val has been completed but the 2007 Schedule B has not. There is a 2007 minimum required contribution of $0. The expected 2007 contribution is $500,000. There was no contribution made for 2006.

At 1/1/07 I have the following AFTAP info:

Assets / CL = 82%

(Assets - COB) / CL = 62%, which becomes 52% at 4/1/08

In the 8/31/07 proposed regs on benefit restrictions, Section II(A)(5) on "deemed election to reduce prefunding and funding standard carryover balances" says that if a plan "is presumed to have an AFTAP less than 60% under the Section 436(h) presumption rules, then the plan is treated as if the plan's funding standard carryover balance and prefunding balance are insufficient to increase the plan's AFTAP to the threshold percentage".

So it seems that even though waiving some of the carryover balance at the 4/1/08 measurement date would allow this plan to pay 50% partial lump sums, that is not possible and the plan is therefore restricted from paying any lump sums until the 2008 AFTAP is certified before 10/1/08 and if that funded percentage is 60% or more.

Is that correct, or have I misinterpreted or missed something?

[Mike Preston]

I thought the presumption rules included the burning of existing balances if, and only if, doing so results in a change of the range from I to II, from II to III, or from I to III (assuming that is possible), where I=<60%; II=60% and less than 80% and III=80% or more.

So, in your case, you burn 90% of your COB on 1/1/08, thereby resulting in a presumed AFTAP of 80%.

Caveat: I'm way too busy to do a chapter and verse on this at the moment, but that is what my gut feel is.

Does anybody disagree?

[Penman2006]

Mike,

Thanks for your response.

If it matters:

"So, in your case, you burn 90% of your COB on 1/1/08, thereby resulting in a presumed AFTAP of 80%."

But then you would subtract 10% to end up with 70%. Which would result in a change from <60% to between 60% and 80%, or I to II in your example.

That II(A)(5) language would seem to apply in my example though. We'll see what others say.

[Andy the Actuary]

"However, if the employer makes an election to reduce some or all of the funding standard carryover balance as of the first day of the first plan year beginning in 2008 in accordance with proposed § 1.430(f)–1(e), then the present value (determined as of the valuation date for the prior year using the valuation interest rate for that prior year) of the amount so reduced is not treated as part of the funding standardaccount credit balance when that balance is subtracted from the value of net plan assets. Thus, an employer’s election to reduce the funding standard carryover balance in 2008 will have the effect of reducing the amount that must be subtracted from the assets in determining the 2007 AFTAP for purposes of applying the presumptions under section 436(h)(3) as of the first day of the 4th month of the plan year beginning in 2008."

The above would support Mr. Preston's contention to change the 2007 AFTAP used for the presumption but then it would appear you would still have to subtract the 10% to determine the presumption as Mr. Penman has concluded.

Please would the dissenters in the peanut gallery speak up.

[Mike Preston]

Thanks, Andy.

It looks like the facts of this case render the 2007 AFTAP almost irrelevant. It is easy to establish a burn of the COB on 1/1/2008 such that the 2007 AFTAP will be 70% and hence the presumed AFTAP on 4/1 will drop to 60%.

You will then need to pump up the 2007 contribution (which you can use in receivable form this one year) until the 2008 AFTAP is 80% if you want to avoid all restrictions.

[Penman2006]

I'm retracting my earlier statemnt as I can see now from reg section 1.436-1(a)(5)(B)(iii) that it only applies after the 10th month per the reference to "paragraph (h)(3)". The explanation section of the reg omitted that "(h)(3)" detail. Thanks Mike and Andy for your responses.