PPA Quarterlies and FSCOB

[Andy the Actuary]

Suppose you have plenty of FSCOB and AFTAP supports its use.

E.g., as of 1/1/2008, FT =2,000,000; Assets = 2,500,000; FSCOB=1,000,000, 2008 TNC=300,000, and contribution of 300,000 made. Quarterlies ared due in 2009 because of PPA convoluted rule of backing credit balance out of assets to test funded status. It is now 2009 and we find FT=2.300,000; Assets=2,500,000 (diversified in matress in 2008); FSCOB=1,000,000; TNC=300,000. Since net assets = 1,500,000 < 94%FT, 2009 contribution = 300,000 (TNC only; no amortization) and quarterly contributions of 75,000 due.

Employer does not wish to make contributions in 2009. To apply FSCOB to quarterlies, we think we must elect a priori.

But, can't we just wait until we file Schedule B to have plan sponsor elect to apply FSCOB at 1/1/2009 to reduce year's contribution?

[david rigby]

Since net assets = 1,500,000 < 94%FT,...

The test for funding phase-in percent is AVA minus prefunding balance (not carryover balance).

[Andy the Actuary]

Since net assets = 1,500,000 < 94%FT,...

The test for funding phase-in percent is AVA minus prefunding balance (not carryover balance).

My nomenclature may have been sloppy. Are we talking about two different concepts? The AVA-PFB is for measuring whether or not new amortization base is needed. In the example, there is no short-fall amortization base. However, net assets = 2,500,000 - 1,000,000 = 1,500,000 and since this is less than %FT, then minimum contribution = TNC + amortization [0] = TNC. Is this incorrect??

David, as always, thank you for your comments.

andy t.a.

[david rigby]

Perhaps we are not focusing on the same thing. At any rate, since I don't have PPA text in front of me to verify, here is my recollection: solely for purposes of determining whether you are subject to a shortfall amortization, compare [(AVA minus prefunding balance) divided by Target Liability] to the phase-in percent. (That is, you are not using FTAP or AFTAP.)

- If you pass that test, your shortfall amortization payment is zero.

- If you fail that test, then determine the actual shortfall as [Target Liability minus (AVA-prefunding balance-carryover balance)].

Are we on the same page?

[Andy the Actuary]

Perhaps we are not focusing on the same thing. At any rate, since I don't have PPA text in front of me to verify, here is my recollection: solely for purposes of determining whether you are subject to a shortfall amortization, compare [(AVA minus prefunding balance) divided by Target Liability] to the phase-in percent. (That is, you are not using FTAP or AFTAP.)

- If you pass that test, your shortfall amortization payment is zero.

- If you fail that test, then determine the actual shortfall as [Target Liability minus (AVA-prefunding balance-carryover balance)].

Are we on the same page?

Yes, we are on the same page as in the example there is no shortfall amortization but the contention is there is a minimum contribution in 2009 -- the TNC -- because as of 1/1/2009 assets net of FSCOB are less the %FT. Because you subtract the FSCOB from assets in 2008 for testing whether or not there are quarterlies for 2009, the conclusion was there are quarterlies for 2009.

The question is do you really have to futz with quarterlies or can the employer elect simply to apply the FSCOB as of 1/1/2009 to reduce the the entire years obligation?

[dmb]

I believe the employer needs to make an election to apply the FSCOB to meet the quarterly requirement. The date the election is made is then the date the quarterly contribution is satisfied. If an election is not made and a contribution is not made, i would say the quarterly contribution has not been satisfied. That does cause issues when you're electing to apply COB based on prior year's information and current year's quarterly requirement could be less. I don't have any cite for this, just MHO for what its worth.

[Andy the Actuary]

I believe the employer needs to make an election to apply the FSCOB to meet the quarterly requirement. The date the election is made is then the date the quarterly contribution is satisfied. If an election is not made and a contribution is not made, i would say the quarterly contribution has not been satisfied. That does cause issues when you're electing to apply COB based on prior year's information and current year's quarterly requirement could be less. I don't have any cite for this, just MHO for what its worth.

Here's why I'm questioning. There appears to be a contradiction. This is from the August 2007 proposed regulation:

"F. Elections Under Section 430(f)

The proposed regulations would provide that an election under section 430(f) is made by the plan sponsor by providing written notification of the election to the plan’s enrolled actuary and the plan administrator, must be irrevocable when made, and must satisfy certain timing rules. The written notification must set forth the relevant details of the election, including the specific amounts involved in the election with respect to the prefunding balance and funding standard carryover balance. An election under section 430(f) generally must be made on or before the due date (with extensions) for the filing of the plan’s Form 5500 ‘‘Annual Return/Report of Employee Benefit Plan’’ for the plan year . . ."

So, does this "F" override the quarterly requirements or do the quarterly requirements override "F"? I would argue that "F" overrides the quarterly requirement since the application of the FSCOB is at the beginning of the year. That said with full confidence, don't ask me how I've done in the market!!!!

[ScottR]

Perhaps we are not focusing on the same thing. At any rate, since I don't have PPA text in front of me to verify, here is my recollection: solely for purposes of determining whether you are subject to a shortfall amortization, compare [(AVA minus prefunding balance) divided by Target Liability] to the phase-in percent. (That is, you are not using FTAP or AFTAP.)

- If you pass that test, your shortfall amortization payment is zero.

- If you fail that test, then determine the actual shortfall as [Target Liability minus (AVA-prefunding balance-carryover balance)].

Are we on the same page?

Yes, we are on the same page as in the example there is no shortfall amortization but the contention is there is a minimum contribution in 2009 -- the TNC -- because as of 1/1/2009 assets net of FSCOB are less the %FT. Because you subtract the FSCOB from assets in 2008 for testing whether or not there are quarterlies for 2009, the conclusion was there are quarterlies for 2009.

The question is do you really have to futz with quarterlies or can the employer elect simply to apply the FSCOB as of 1/1/2009 to reduce the the entire years obligation?

Here's an article that might help:

http://benefitslink.com/articles/guests/washbull080428a.html

The article suggests that employers who do not make required quarterly contributions may be deemed to have applied part of their FSCOB to cover the quarterly requirements. This deemed election is essentially irrevocable, so the FSCOB will have to be reduced on the Schedule SB even if the employer subsequently makes deposits. Not a big deal if the employer intends to apply the FSCOB to cover the TNC, but it IS a big deal if the employer intends to deposit the TNC later in the plan year.

[Andy the Actuary]

Thank you. That was helpful. My eyes remembered having read it previously but my mind obviously didn't. At least the preamble to the regs addresses the possibility of a deemed election.