60-80% AFTAP and Amendments

[Blinky the 3-eyed Fish]

Sample owner-only plan has an AFTAP between 60-80%. The desire is to amend the plan to increase benefits retroactively and prospectively. Of course under 436© to allow for the amendment a contribution equal to the increase in the amendment's increase in the funding target must be made. This contribution can't count toward the minimum contribution.

Let's assume the maximum deductible contribution is equal to the minimum required because we can't considered increases in benefits for HCE's in the last two years. It would seem then that the amount required to fund the increase in the funding target is not deductible in this year. This of course makes sense or one could easily skirt the two-year requirement. Anyone disagree?

I would presume the 436 contribution would be a carryforward deductible in future years as allowable and that no excise tax would be required. Of course I haven't lengthened my research to that yet.

[Mike Preston]

I'm confused about the numbers, can you give an example?

[Blinky the 3-eyed Fish]

1/1/08 Funding Target (pre-amendment) = 240,000

1/1/08 Funding Target (post-amendment) = 290,000

1/1/08 Assets = 180,000

CB = 0

AFTAP pre-amendment is 75% so the amendment is allowable if the increase in the funding target is contributed but doesn't count toward the minimum required contribution = 50,000

Minimum required contribution = 150,000

Maximum deductible contribution = 150,000 (i.e., not higher than minimum which would be common in a situation increasing benefits for HCE's)

Thus, it would seem as if the only amount that can be deducted is 150,000, yet the total amount contributed is 200,000.

[Mike Preston]

Maybe I'm just confused, but I thought the exclusion from the FT for HCE benefits with respect to amendments made within the last two years was only effective with respect to the cushion. I agree it is excluded from the cushion.

So, assuming for some strange reason that you have no cushion at all (an existing plan was frozen and an amendment was adopted 1 year ago increasing benefits solely for HCE's (this is getting very weird), the plan is aggregated with another plan for satisfaction of a4, so the only participants in this plan are HCE's, then all the "old" participants were paid out and the assets in the plan precisely equaled what they were owed (have I mentioned this is getting very weird?)), wouldn't the increase in the FT be amortized over 7 years for minimum funding purposes? Doesn't everything that isn't in the NC for the year fall into the FT and get amortized over 7 years to the extent it isn't already being amortized?

[SoCalActuary]

1/1/08 Funding Target (pre-amendment) = 240,000

1/1/08 Funding Target (post-amendment) = 290,000

1/1/08 Assets = 180,000

CB = 0

AFTAP pre-amendment is 75% so the amendment is allowable if the increase in the funding target is contributed but doesn't count toward the minimum required contribution = 50,000

Minimum required contribution = 150,000

Maximum deductible contribution = 150,000 (i.e., not higher than minimum which would be common in a situation increasing benefits for HCE's)

Thus, it would seem as if the only amount that can be deducted is 150,000, yet the total amount contributed is 200,000.

In your example, you get the cushion on the pre-amendment FT = 1.5 * 240,000 = 360,000

So you have $180,000 of contribution for the pre-amendment FT, plus the TNC.

So you designate $50k as 436 contribution, and you still have 430 cost of 7 yr amortization on the 110,000 underfunding, plus the TNC.

Is there a problem with this?

At the least, you get 100% of new FT of 290 - 180 = 160,000 deductible, plus the TNC.

How do you arrive at max deductible of $150,000?

[Blinky the 3-eyed Fish]

I guess what I didn't look at closely, but have now is as Mike says, the amendment increases only affect the cushion amount. Since the increase in the funding target increases are all able to be flowed into the maximum deductible amount, my original question is moot.

Thanks.