What is a Shortfall?

[Calavera]

From Defined Benefit Answer Book Q19:104

Example:

The funding target of $1,452,362, in Q 19:102, is used in this example. The value of assets in the plan as of December 31, 2007 is $1,000,000. The plan had a funding standard carryover balance of $100,000. Therefore, the value of assets to use is $900,000. The transition rule from Q 19:105 is used, so the funding target is multiplied by 92 percent, or $1,336,173. The shortfall amortization base is equal to $1,336,173 less $900,000, or $436,173. This base is amortized over seven years using the segment rates in effect. Since there are two segment rates in effect over a seven-year period (the first segment rate is effective for the first five years, and the second is effective for the last two years), the calculation of the amortization is a little more complicated. The present value at each year must be calculated using the particular rate, and then added together...

I thought the transition rule (i.e 92% of target liability) is used for the exemption from the shortfall amortization calculation. But if not exempt, full target liability is used to calculate the shortfall and the shortfall amortization base.

Did I miss some corrections, explanations, etc. that stated that 92% of the funding target could be used to calculate a shortfall amortization base?

[SoCalActuary]

You are correct. The book is wrong. Shhhhh. It happens.

[Andy the Actuary]

With or without my disclaimer, I also offer my unfettered opinion that you've got it right.

[ak2ary]

If you read the statute, it seems in one section that it says what the Answer Book says...prolly the reason for the mistake. But yes I agree with the others use 100% of the funding target to calc the shortfall

[mwyatt]

Just perused the 2009 DB Answer Book which arrived at my desk this morning. Check out Q19:104; they're using 92% of FT less Assets to define shortfall amortization base.

Curious...

[Andy the Actuary]

The DB Pension Answer Book author is an EA and probably wouldn't mind being contacted (I'm too busy posting meaningless puzzles).

[david rigby]

Don't forget that the test for exemption from shortfall amortization is based on AVA minus prefunding balance (not carryover balance).

[tymesup]

The DB Pension Answer Book author is an EA and probably wouldn't mind being contacted (I'm too busy posting meaningless puzzles).

I dropped him a line.

[Guest RRO]

I would like to resurrect this thread to ask a specific question that refers to David Rigby's comment that the shortfall exemption is based on AV less prefunding balance only. There is a statement in 430(f)(4)(A) that says that for purposes of the exemption in 430©(5), the value of plan assets is such amount, reduced by the prefunding balance, but only if an election is made to apply any portion of the prefunding balance to reduce the minimum required contribution for the plan year.

My question is how to apply this in 2008 when there are no prefunding balances. I have the following situation:

TNC = 300,000

FT = 2,600,000

AV = 3,500,000

COB = 1,200,000

PFB = 0

Assets of 3,500,000 are clearly greater than the funding target even before application of the 92% transition, but assets less COB (2,300,000) are clearly less than 92% of the funding target (2,392,000).

There is a funding shortfall under 430©(4), but does the exemption under 430©(5) apply? Is this plan required to set up a shortfall base in 2008?

[Andy the Actuary]

I would like to resurrect this thread to ask a specific question that refers to David Rigby's comment that the shortfall exemption is based on AV less prefunding balance only. There is a statement in 430(f)(4)(A) that says that for purposes of the exemption in 430©(5), the value of plan assets is such amount, reduced by the prefunding balance, but only if an election is made to apply any portion of the prefunding balance to reduce the minimum required contribution for the plan year.

My question is how to apply this in 2008 when there are no prefunding balances. I have the following situation:

TNC = 300,000

FT = 2,600,000

AV = 3,500,000

COB = 1,200,000

PFB = 0

Assets of 3,500,000 are clearly greater than the funding target even before application of the 92% transition, but assets less COB (2,300,000) are clearly less than 92% of the funding target (2,392,000).

There is a funding shortfall under 430©(4), but does the exemption under 430©(5) apply? Is this plan required to set up a shortfall base in 2008?

FTAP=(3,500,000 - 0) / 2,600,000 > 92% so no SAB or SAC. The TNC is not included in the calculation.

[Guest RRO]

Thanks Andy. So, if I understand your calculation, you are applying the ©(5) exemption and adjusting the assets for the prefunding balance only, not the carryover balance as required in 430©(4), correct? And I agree, the TNC is extraneous information that doesn't come into play for this calculation.

[Andy the Actuary]

Thanks Andy. So, if I understand your calculation, you are applying the ©(5) exemption and adjusting the assets for the prefunding balance only, not the carryover balance as required in 430©(4), correct? And I agree, the TNC is extraneous information that doesn't come into play for this calculation.

Yes, and it is near impossible (at least for me) to keep this stuff straight, in particular since the shortfall is computed by subtracting out both the FSCOB and prefunding. I speak with full confidence as I recite from my crib sheet!!!!! Of course, the fun part is you only subtract the PFB if it will be used to offset the minimum contribution, which you may not know at the time you make the calculation.

[Guest RRO]

So, 430(f)(4)(A) and 1.430(f)-1©(2)(i) are telling me that for purposes of the shortfall base exemption, the prefunding balance is only subtracted from the assets if any portion of it is used toward the minimum contribution, and 1.430(f)-1©(2)(ii) tells me that the FSCOB is never subtracted even if no portion of it or the prefunding balance is used toward the minimum.

Therefore, in my situation, the assets of 3,500,000 exceed the funding target, so the exemption would apply if I can assume that I am using a portion of the prefunding balance toward the minimum contribution. But, 430(f)(3)(B) and 1.430(f)-1(d)(2) tell me that, if a FSCOB exists, no amount of the prefunding balance can be used toward the minimum until the FSCOB is used up.

Does this imply that if I have a FSCOB remaining at the end of the plan year after using it as allowed for the various purposes that it can be used for, that I can't assume the use of the prefunding balance to reduce the minimum and, therefore, the 430©(5) exemption does not apply?

[Andy the Actuary]

So, 430(f)(4)(A) and 1.430(f)-1©(2)(i) are telling me that for purposes of the shortfall base exemption, the prefunding balance is only subtracted from the assets if any portion of it is used toward the minimum contribution, and 1.430(f)-1©(2)(ii) tells me that the FSCOB is never subtracted even if no portion of it or the prefunding balance is used toward the minimum.

Therefore, in my situation, the assets of 3,500,000 exceed the funding target, so the exemption would apply if I can assume that I am using a portion of the prefunding balance toward the minimum contribution. But, 430(f)(3)(B) and 1.430(f)-1(d)(2) tell me that, if a FSCOB exists, no amount of the prefunding balance can be used toward the minimum until the FSCOB is used up.

Does this imply that if I have a FSCOB remaining at the end of the plan year after using it as allowed for the various purposes that it can be used for, that I can't assume the use of the prefunding balance to reduce the minimum and, therefore, the 430©(5) exemption does not apply?

The exemption applies so long as you're not using the PFB to reduce contributions. You cannot use the PFB before the FSCOB. Of course, you are not required to create a PFB.

[Guest RRO]

Ah - so as long as there is a FSCOB, the exemption will apply.

[carrots]

From Defined Benefit Answer Book Q19:104

Example:

The funding target of $1,452,362, in Q 19:102, is used in this example. The value of assets in the plan as of December 31, 2007 is $1,000,000. The plan had a funding standard carryover balance of $100,000. Therefore, the value of assets to use is $900,000. The transition rule from Q 19:105 is used, so the funding target is multiplied by 92 percent, or $1,336,173. The shortfall amortization base is equal to $1,336,173 less $900,000, or $436,173. This base is amortized over seven years using the segment rates in effect. Since there are two segment rates in effect over a seven-year period (the first segment rate is effective for the first five years, and the second is effective for the last two years), the calculation of the amortization is a little more complicated. The present value at each year must be calculated using the particular rate, and then added together...

I thought the transition rule (i.e 92% of target liability) is used for the exemption from the shortfall amortization calculation. But if not exempt, full target liability is used to calculate the shortfall and the shortfall amortization base.

Did I miss some corrections, explanations, etc. that stated that 92% of the funding target could be used to calculate a shortfall amortization base?

I apologise for re-resurrecting this if it has been covered elsewhere, but the author of the DB Answer Book may be prescient.

Under the amendments provided by WRERA, it is now correct, for 2008, to use 92% of the funding target in the calculation of the shortfall amortization base!

[Andy the Actuary]

Yes, provided plan was not subject to deficit reduction contributon in 2007.