HCE restrictions under Treas. Reg. 1.401(a)(4)-5

[JAY21]

Anyone know, or willing to venture an opinion, whether we will substitute target liability (based on segment rates) for current liability under IRC 412(l)(7) when calculating whether there are restrictions on HCEs lump sum distributions (i.e., the 110% funded test).

I assume this restriction lives on even in the new AFTAP world and thus an 80% AFTAP isn't enough to lift restrictions for HCE lump sums.

[Effen]

You are correct that the restriction lives on, however I don't think we have any guidance. I'm thinking that 110% of the funding target is the only logical choice.

Any other ideas out there?

[Andy the Actuary]

You are correct that the restriction lives on, however I don't think we have any guidance. I'm thinking that 110% of the funding target is the only logical choice.

Any other ideas out there?

This particular 401(a)(4) reg was always somewhat nebulous. It was never stipulated on what day the valuation was to be made or what interest rate to be used in the CL range. For that matter, 412(l)(7) only loosely defined CL, but there is no more (l)(7). The key perhaps is 1.401(a)(4)-5(b) which provides that ". . . any reasonable and consistent method may be used for determining the value of current liabilities and the value of plan assets." So, while your suggestion appears to be a reasonable method, there may be other reasonable methods. For example, valuing 110% of the CL (FT?) as of the date of distribution (rather than the actuarial valuation date) using the 430 "effective" interest rate could be viewed as a reasonable method.

[ak2ary]

In the grey book session at this years EA meeting the IRS confirmed that there really are no rules for the timing of the determination and also confirmed that you can use either 110% of CL or 110% of funding target

[Andy the Actuary]

In the grey book session at this years EA meeting the IRS confirmed that there really are no rules for the timing of the determination and also confirmed that you can use either 110% of CL or 110% of funding target

Thank you. It is, however, worthwhile to add the grey book caveat: ". . . the responses do not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any taxpayer for any purpose," which has even more teeth for nonwritten comments.

[tymesup]

In the grey book session at this years EA meeting the IRS confirmed that there really are no rules for the timing of the determination and also confirmed that you can use either 110% of CL or 110% of funding target

This was my understanding from a few years back. I don't see how you would be compelled to do a complete new valuation in order to make a distribution. The one line I wouldn't cross would be to use different methods for different participants for the same plan.

Perhaps 110% was used to recognize that calculations would generally not be current.

This does raise the issue that the sponsor is encouraged to overfund the plan and may incur a reversion tax later on. For example, suppose the plan is frozen and a restricted ee leaves. If the sponsor ponies up to get to 110%, the excess may never be used up.

[david rigby]

FYI, it is Q&A 30 from 2008 Gray Book.