AFTAP Loophole?

[Guest GMP]

Below is an extract from a Mercer GRIST article I just stumbled across that was published right after the proposed regs were published in September. I don't see that the proposed regs issued in December closed the loophole described in the second point. Any comments?

No AFTAP presumption or certification.

Before an actuary certifies the AFTAP, lump sums

and benefit accruals are not restricted, unless presumed AFTAP rules apply, Otherwise, a plan

may not stop benefit accruals (except by prospective plan amendment), even if the employer is

certain the restriction will apply after the AFTAP is certified. This rule has strange – and perhaps

unintended – consequences for the 2008 plan year:

First, because benefit restrictions were not in effect for the 2007 plan year, no plans have a

presumed AFTAP at the start of 2008 plan year. This means no plans are subject to lump sum

or accrual restrictions during the first three months of the 2008 plan year and before the

actuary has certified the 2008 AFTAP.

Second, if the plan has obtained a certification of the 2007 lookback AFTAP by the start of

the fourth month of the 2008 plan year (April 1, 2008 for calendar-year plans), it has a

presumed 2008 AFTAP on that date only if the 2007 lookback AFTAP was within one of

two ranges specified in the regulations: at least 60% but less than 70%, or at least 80% but

less than 90%. All other plans that obtained timely 2007 lookback AFTAP certifications –

that is, plans with 2007 lookback AFTAP below 60%, at least 70% but less than 80%, or at

least 90% – are not subject to lump sum or accrual restrictions during the first nine months of

the plan year and before the actuary has certified the 2008 AFTAP. If the final regulations

retain this rule, some well-funded plans could have restrictions triggered six months earlier

than some poorly funded plans.

Example. Before April 1, 2008, calendar-year pension Plan A obtains an actuary’s

certification that its 2007 lookback AFTAP is 83%. This is within one of the ranges (at least

80% but less than 90%) that triggers a presumption on April 1, 2008. Unless Plan A obtains

by April 1, 2008 an actuary’s certification that its 2008 AFTAP is at least 80%, its 2008

presumed AFTAP is 73% (prior year’s 83% AFTAP minus 10%), triggering partial lump

sum restrictions starting April 1.

Example. Before April 1, 2008, calendar-year pension Plan B obtains an actuary’s

certification that its 2007 lookback AFTAP is 55%. Because Plan B’s 2007 lookback AFTAP

is outside of the ranges that trigger presumptions on April 1, Plan B may continue benefit

accruals and unlimited lump sum payments through September 30, 2008. In fact, to stop

paying lump sums before October 1, 2008, Plan B must obtain an actuary’s certification that

the plan’s 2008 specific AFTAP is below 60% (because “less than 60%” isn’t a permissible

range certification).

IRS representatives have indicated informally that they did not intend to allow plans less than

90% funded to take advantage of this six-month extension. Therefore, sponsors of plans with

2007 lookback AFTAP below 60% or at least 70% but less than 80% should look for changes in

the final regulations that may require them to obtain 2008 AFTAP certifications by the fourth

month of 2008.

[Mike Preston]

This isn't new. The IRS is aware of it. I seem to recall that they did, in fact, modify the proposed regulations to ensure that this issue becomes, well, a non-issue. I just can't lay my fingers on the cite at the moment. Maybe it was just an informal announcement saying that the final regulations will provide that this issue never really sees the light of day.

[Andy the Actuary]

This may help:

http://www.jpmorgan.com/cm/Satellite?c=JPM...l_Page_Template

[Guest GMP]

Thank you for the information.