Is Recertification Necessary

[Andy the Actuary]

Let say as of the 2009 AFTAP for a calendar year plan (with January 1 valuation date) is certified to be 103% and that this Plan was frozen in 2007. So, no contribution is required for 2009. An HCE terminates employment on June 12, 2009 and wants a lump sum distribution. The Plan Sponsor is willing to pony up the additional amount to credit to 2008 so that the AFTAP after distribution would be 110%. That is (assets 1/1 - lump sum) / (FT 1/1 - 430 liability for participant) = 110%.

Is it necessary to recertify the AFTAP?

For that matter, forget the distribution. Suppose the same facts but the Plan Sponsor just contributes more for 2008. Is it necessary to recertify the AFTAP?

The conclusion is that since the circumstances if the AFTAP were reissued would be more favorable, then there is no purpose in recertifying the AFTAP other than to make it agree with Schedule B.

Agreements, disagreements, don't knows, don't cares?

[tymesup]

Congratulations on your now overfunded plan. If all your assumptions are realized and the yield curve is correct, the employer just put in money that wasn't necessary.

[Andy the Actuary]

Congratulations on your now overfunded plan. If all your assumptions are realized and the yield curve is correct, the employer just put in money that wasn't necessary.

Not today, certainly, but perhaps tomorrow!!!

Anyhoo, because the 110% determination has historically been performed as of the first day of the Plan Year, the sponsor would still need to make the contribution to get to 110% to ensure the method is applied consistently.

[tymesup]

If the employer wants to pay out this terminated HCE, wouldn't it be cheaper for the employer to terminate the plan (no contribution necessary) than to pony up to 110% (something around than 7% of the Funding Target, less the eventual reversion).

Does the terminated HCE have any leverage to force the employer to make the contribution and make the distribution?

[Andy the Actuary]

If the employer wants to pay out this terminated HCE, wouldn't it be cheaper for the employer to terminate the plan (no contribution necessary) than to pony up to 110% (something around than 7% of the Funding Target, less the eventual reversion).

Does the terminated HCE have any leverage to force the employer to make the contribution and make the distribution?

This is an ongoing plan of a prosperous family owned company -- actually companies which comprise a multiple employer plan. The plan will have a long life after this non-family member HCE terminates. Any additional contribution will simply serve -- at least in theory -- to reduce future contributions.

[tymesup]

I thought this plan was frozen, per post 1. On a deterministic basis, if you're at 103%, there won't be any future contributions to be reduced.

On another board, the notion of puts and calls was suggested for a different situation. It might be appropriate here, to hedge against the likely bad year and subsequent required contribution.

[Andy the Actuary]

I thought this plan was frozen, per post 1. On a deterministic basis, if you're at 103%, there won't be any future contributions to be reduced.

I lied. I usually work my examples to eliminate complication. I forgot that I had frozen the plan so that I wouldn't have to deal with 2009 contributions. Mea culpa.