Quarterly Contributions under PPA

[Dennis Povloski]

I read an article on quarterly contribution requirements that came to me through an e-mail newsletter (BenefitsLink or TAG, I think), but I can't seem to find it again. I wanted to go back and read it again to see if I correctly understood what I read.

The article had a discussion on unexpected consequences due to the use the credit balance to satisfy quarterly contribution requirements. If I remember correctly, it said that an election to use the credit balance to satisfy the quarterly would satisfy the quarterly requirement, but not count towards any minimum funding.

Over simplified example, if your minimum was $100,000, your quarterly was $25,000, and your credit balance was $25,000. You elect to use your credit balance to satisfy your first quarterly installment, so the first quarterly is deemed to have been made even though you didn't deposit a contribution to satisfy it. At the end of the year, you are still required to put in the full $100,000 adjusted for interest due to missed quarterly 2,3 & 4 and whatever other interest may apply.

Does anyone recall seeing this or have any insight on how this works?

Thanks!

[dmb]

I was looking for the same article yesterday. See attached.

I read an article on quarterly contribution requirements that came to me through an e-mail newsletter (BenefitsLink or TAG, I think), but I can't seem to find it again. I wanted to go back and read it again to see if I correctly understood what I read.

The article had a discussion on unexpected consequences due to the use the credit balance to satisfy quarterly contribution requirements. If I remember correctly, it said that an election to use the credit balance to satisfy the quarterly would satisfy the quarterly requirement, but not count towards any minimum funding.

Over simplified example, if your minimum was $100,000, your quarterly was $25,000, and your credit balance was $25,000. You elect to use your credit balance to satisfy your first quarterly installment, so the first quarterly is deemed to have been made even though you didn't deposit a contribution to satisfy it. At the end of the year, you are still required to put in the full $100,000 adjusted for interest due to missed quarterly 2,3 & 4 and whatever other interest may apply.

Does anyone recall seeing this or have any insight on how this works?

Thanks!

quarterly_contr_cred_bal_use.pdf

[Dennis Povloski]

That's the one. Thanks!

[Effen]

FROM THE DELOITTE ARTICLE For example, assume that for 2006 the minimum required contribution (not

taking into account any credit balance) is $150,000. The plan has a credit balance

of $100,000, and quarterly contribution requirements of $25,000 per quarter ...

... In case 2 the plan sponsor elects to use the funding standard carryover balance to satisfy the quarterly

contribution requirements, and makes a contribution of $150,000 by September 15, 2009. In this case,

there is still no addition to the prefunding balance. In addition, the plan sponsor used the entirety of the

funding standard carryover balance to satisfy quarterly contribution requirements, so that the funding

standard carryover balance is reduced to zero. This result is different than the pre-PPA scenario, andmay

be troubling to many plan sponsors.

Does everyone agree with what Deloitte is saying here or am I missing something?

It seems like they are pulling their conclusion from Example 4 in the 1.430(i) Regs where it seems to say once you have used the credit balance, you don't get to carry it forward into the next year. Reading between the lines, it seems if you applied the example 4 logic you would say in order to satisify the minimum required contribution, the 6/30/09 contribution would have needed to be $120,829 (120,829/1.059^(6/12)+7585 = 125,000) since you use up the credit balance for the quarterly. But that makes no sense.

HOWEVER, Example 5 seems to say that the minumum required was actually only $108,000 (125,000 - $17,000 credit balance) and using that logic the June 30 payment only had to be 103,334 (103,334/1.059^(6/12)+7585 = (125,000-17000)), which would make Deloittes conclusion wrong?

I can't see how Deloitte could be correct. Consider a plan with a MRC, prior to offset for CB of $100K and a $100K CB. Assume it has quarterlies of $25K. Using Deloitte's logic, although the client doesn't really have a contribution due since their CB > MRC, if they elected to use the CB to offset the quarterlies, they would end up having to put in $100K. That can't be right.

Maybe we will find out the answer at Thursday's web cast, but I was interested in other opinions.

[Guest Dan Moore]

The Deloitte article is correct. If you look at Code section 430(f)(6), you see that a prefunding balance is only created if the employer contributions exceed the minimum required contribution (MRC), which is defined in 430(a) as the TNC plus shortfall amortization if applicable. In the 2nd Deloitte case, the sponsor uses up the carryover balance to fund the 4 $25K quarterlies, and then contributes $150K (= the MRC) on the following 9/15. They don't contribute in excess of the MRC, so no prefunding balance is created.

[Effen]

and then contributes $150K (= the MRC)

- maybe this is part of the confusion - the article states "the minumum required contribution (not taking into account any credit balance) is $150,000", so if the MRC by definition ignores the credit balance, what do we call the actual minumum required contribution?

Either way, their illustration seems to go against Example 5 that states the MRC is $108,000 ($125,000-$17,000 CB)? Maybe my confusion is between the interplay of the creation of the prefunding balance (which I think Ex. 4 is discussing) and the actual min. required contribution (Example 5). Looking at examples 4 & 5 from the Regs are you suggesting that the minimum is actually $108,000, but it would take a contribution of more than $125,000 (MRC?) to create a prefunding balance?

What would the 6/30 payment need to be to satisify minimum? $103,334 or $120,829?

Let's assume we have a plan with a TNC+ SA = $110K, a CB of $150K and quarterlies of $25K. Taking Deloitte's logic, if the employer elected to use the CB to offset the quarterlies they would owe a contribution of $60K because they used up $100K of their CB on the quarterlies (all adjusted for interest). That doesn't make sense, their minimum s/b $0 no matter what since their CB > TNC + SA?

[Guest Dan Moore]

and then contributes $150K (= the MRC)

- maybe this is part of the confusion - the article states "the minumum required contribution (not taking into account any credit balance) is $150,000", so if the MRC by definition ignores the credit balance, what do we call the actual minumum required contribution?

Either way, their illustration seems to go against Example 5 that states the MRC is $108,000 ($125,000-$17,000 CB)?

You're right, the use of the term MRC in example 5 is confusing. The Treasury reg seems to be following their time-honored tradition of letting one term have several different meanings (see full funding limitation, AFTAP, etc.)

My opinion: Here, MRC means the 430(a) MRC, minus the carryover balance because an election was made to use it.

Example 4 is somewhat like the Deloitte example: they contribute $207,713, with a 1/1/2009 discounted value of $201,934. 2009 MRC (430(a)) is $125,000, so the resulting prefunding balance is $76,934. There was a $17,000 carryforward balance which got used up.

Why they bring forward the $76,934 PFB to 1/1/2010 at 5.9% is a mystery to me. I think this should be done at the plan's actual rate of return.

[Effen]

Looking at examples 4 & 5 from the Regs are you suggesting that the minimum is actually $108,000, but it would take a contribution of more than $125,000 (MRC?) to create a prefunding balance?

Am I allowed to quote myself? Anyway, in case there are others who weren't understanding this, I spoke to the IRS and they confirmed that this was the correct interpretation. The Deloitte article was looking at the pre-funding balance, not the min. required contribution. In my example, the $108,000 would be the minimum required contribution, but they would need to put in more than $125,000 before they added to the prefunding balance. (I'm not sure what happens between 108,000 and 125,000, I assume it just gets ignored for carryover or pre-funding purposes.)

So in the 2nd Deloitte example, although the sponsor elected to put in $150,000, the min. required contribution was only $50,000, but they needed to put in more than $150,000 before the pre-funding balance was increased.

So I guess another difference between example 1 & 2 is that in example 1, the sponsor goes into 2009 with their $100,000 carryover balance, but in example 2 they have $0 carryover even though the same amount was ultimately deposited.

Is that right?

Therefore, since quarterlies are required for any plan with a funding shortfall, and since funding shortfalls are determined after the assets have been reduced by the carryover, if I have an frozen overfunded plan (funding target > MV assets) with a funding shortfall (because of a large carryover balance), the quarterlies will eventually eat up the carryover balance even if the plan never becomes underfunded. I guess that makes sense?

OOps - If you are frozen and overfunded, your MRC would be $0, so you wouldn't have any quarterlies due after all.

[YankeeFan]

Suppose a calendar year plan is subject to quarterly contributions of 25k and the plan has carryover and/or prefunding balances totaling 100k. The required minimum contribution for the year is 100k. Must the employer use the carryover and/or prefunding balances to satisfy the quarterly contributions? Could the employer elect not to use the carryover and/or prefunding balances and simply contribute 100k prior to 9/15? Of course in this scenario, the quarterly contributions would have been missed but the carryover and prefunding balances have been preserved. Is this legal?

[SoCalActuary]

You are only considering the movement of a credit between the COB and PFB with this choice.

Use the COB or PFB to satisfy the MRC for the year. Then make the contribution, placing the entire excess amount into the PFB. No notices to participants, no quarterly interest adjustments.

Of course, this only works if you are allowed to apply the prior credits because the funding ratio is 80%.

[YankeeFan]

You are only considering the movement of a credit between the COB and PFB with this choice.

Use the COB or PFB to satisfy the MRC for the year. Then make the contribution, placing the entire excess amount into the PFB. No notices to participants, no quarterly interest adjustments.

Of course, this only works if you are allowed to apply the prior credits because the funding ratio is 80%.

In my example where the minimum required contribution is 100k, I thought that if the 100k contribution is made on 9/15, nothing can be added to the prefunding balance since the contribution for the year did not exceed the plan year's minimum required contribuiton. That was my understanding based on the above posts. Has something changed from the proposed regs?

[FAPInJax]

Yes. The final regulations 'corrected' the problem where the balance could be lost. It just 'transfers' from the carryover to the prefunding side (which is not as useful but still there).

[Mike Preston]

Are you sure it is a transfer issue? Assume we are talking about a plan that was started in 2009 and we are dealing with a PFB in 2016. Wouldn't the same "fix" that the IRS gave us in the regulations apply? The issue, as I see it, is that you end up being able to count the excess contributions towards additional PFB, but the amount that is generated that wouldn't have been under the proposed regs is subject to an immediate real rate of return adjustment, rather than an effective rate adjustment.

[FAPInJax]

True. The 'transfer' meant that it would be treated as though always a prefunding amount. This amount is then subject to the real rate of return as you point out.

[Guest Dan P Moore]

Suppose a calendar year plan is subject to quarterly contributions of 25k and the plan has carryover and/or prefunding balances totaling 100k. The required minimum contribution for the year is 100k. Must the employer use the carryover and/or prefunding balances to satisfy the quarterly contributions? Could the employer elect not to use the carryover and/or prefunding balances and simply contribute 100k prior to 9/15? Of course in this scenario, the quarterly contributions would have been missed but the carryover and prefunding balances have been preserved. Is this legal?

For example, $100k is due by 9/15/10 for the 2009 plan year and 2010 quarterly required contributions are $25k?

I think the answer is yes, this is legal, but the plan sponsor has late quarterlies and must deal with this fact. There are participant notices & an interest penalty.

You are only considering the movement of a credit between the COB and PFB with this choice.

Use the COB or PFB to satisfy the MRC for the year. Then make the contribution, placing the entire excess amount into the PFB. No notices to participants, no quarterly interest adjustments.

Of course, this only works if you are allowed to apply the prior credits because the funding ratio is 80%.

What is this from - the 10/15/09 reg or the June 2010 relief legislation?