404(o) Max Deduction Issues

[mwyatt]

Working my way through 404(o) to determine methodology for 2008 valuations and have the following observations/questions (realm is small plans under 100 lives):

404(o) right now has the greater of the 430 minimum required contribution and the result of the following:

1) Funding Target for 430 purposes, plus

2) Target Normal Cost for 430 purposes, plus

3) Cushion Amount, composed of:

3Ai - 50% of Funding Target, adjusted by eliminating the effect of any increases arising from amendments within the last two years for HCEs - this also includes automatic COLA increases to benefit and salary limitations, so that a 1/1/2008 valuation would recompute a hypothetical 1/1/2008 accrued benefit for HCEs taking into account 2005 salary and 415 dollar limitations

3Aii - increase in Funding Target again arising from future salary increases (in practice with high end HCEs, no effect, but impact rank and file participants)

then subtract Plan Assets under 430(g) to get cap on result.

My questions:

1) Assume as in past practice that we would NOT reduce Plan Assets by carryover or prefunding balances

2) 430 minimum is determined as of the beginning of the plan year. As opposed to past practice where this was increased with interest to the end of the year, we're now dealing with a role reversal where we are discounting actual contributions back to the beginning of the year using Effective Interest Rate. Is there any (and I know we don't have 404(o) regs out yet) mechanism to adjust the 404(o) maximum past the beginning of the year amount to reflect contributions after the first day of the year. In past practice under 404 (assuming plan year equalled fiscal year), we did adjust our results by the valuation interest rate to the end of the year to determine the max deductible contribution. So if our old result had 404NC of $100,000 @ 1/1/2007, val interest rate of say 6%, then the max deductible contribution for 2007 would be $106,000, regardless of when the contribution was actually made, either during or after the plan year. Under the new law, let's say we come up with BOY figure of $100,000 and again a 6% EIR. Would the max deductible contribution be $100,000, $106,000, or $100,000 adjusted @ 6% based on actual date of deposit?

Any thoughts on this (and if there is any knowledge of adding TNC to the 50% cushion amount in the Technical Corrections Bill?)

[Mike Preston]

Bump.

[Blinky the 3-eyed Fish]

I am not up to speed on this yet so I have just two limited thoughts.

1) I had heard Holland saying that COLA increases counted as amendments within the last two years, but does anyone agree with this? I certainly don't.

2) Adding the TNC in calculating the cushion amount is part of technical corrections.

[mwyatt]

From the EA Meeting that certainly seemed to be the position that amendments also include automatic amendments. The "weirdo" part of it was if you have an existing plan around for awhile, a calendar 1/1/2008 valuation would look back to the 12/31/2005 limits. Similarly in '09, would look to the '06 limits. However, a new plan established 1/1/2008 in '09 would still use the '08 limits (which would also apply in '10).

God help the poor software companies; how do you code for this?

[Mike Preston]

Inaccurately.

[mwyatt]

Ya think? Been going back and forth with our software vendor, but realistically the only thing that I think can be feasable would be for a special field in employee specs where you could enter what you think is the correct number. Either that, or export data to a spreadsheet and prorate (never did trust canned reports off of val software anyways).

[AndyH]

Mike (W), didn't you leave the at-risk part of the calculations out of the maximum in your summary above? As I understand it (not well be any means), the max that you derived would be checked against the at-risk minimum that would apply if the plan were at-risk, so you technically need to evaluate any and all subsidies before you can say you have the "real" max. (Not that this will always be done in practice).

Apparently we're not the only ones trying to figure 404 out and deal with software issues (not to mention client requirements) at the same time.

[mwyatt]

Yep, the At Risk does factor in, although with under 500 lives and assumed lump sum funding think the cushion amount will likely override this part of the equation (also, didn't even want to bring that one up yet since I only see big fat 0s on our vendor's screen for At Risk FT and TNC at this point). Andy, what's your company's thought on the interest adjustment (although w/o any regs at this point guess we are looking at tea leaves at the bottom of the cup).

[AndyH]

I don't think we've addressed that yet. The max is big enough as is. When we do I'll let you know.

[Mike Preston]

(although w/o any regs at this point guess we are looking at tea leaves at the bottom of the cup).

Have you been bugging my office? I've used that method for YEARS.

[mwyatt]

The ERISA Ouija Board is also quite popular.