AFTAP and Contributions

[Andy the Actuary]

Please consider these facts. Calendar year plan. 2008 AFTAP >100%. 2008 minimum has been contributed prior to 12/31/2008. Assets 12/31/2008=3,600,000; FT=4,800,000; TNC=400,000. FSCOB=2,000,000. 7 Yr amortization factor = 6. Plan is ongoing and pays lump sums. Forget about interest adjustments and quarterly contributions -- they only apply in the real world.

AFTAP (w/o CB) = 3,600,000/4,800,000 = .75 so plan must subtract FSCOB to determine AFTAP. Then,

AFTAP= (3,600,000 - 2,000,000)/4,800,000=.33.

Alternative 1, get an 80% AFTAP. (a) burn FSCOB and contribute in 2009 before 4/1/2009 for 2008 (.8 - .75) x 4,800,000 = 240,000. Do not add 240,000 to prefuding balance. 2009 Amortization = (4,800,000 - 3,840,000)/6=160,000. 2009 Contribution = 400,000(TNC) + 160,000 = 560,000, and total contribution = 240,000 + 560,000 = 800,000

(b) contribute in 2009 before 4/1/2009 for 2008 (.94 - .75) x 4,800,000 = 912,000. Do not add to prefunding balance. FSCOB is preserved. AFTAP=4,512,00/4,800,000=94%. 2009 contribution = 400,000 (TNC) but may use FSCOB to reduce to 0.

Alternative 2. Forget about 80% AFTAP. We are required to burn enough of FSCOB to get to 60%. 60% of 4,800,000 = 2,880,000. So, 3,600,000 - x = 2,880,000 ==> x=720,000. We must burn 2,000,000 - 720,000= 1,280,000. 2009 amortization = (4,800,000 - (3,600,000 - 720,000))/6=320,000. 2009 contribution = 400,000 (TNC) + 320,000 = 720,000. Part of FSCOB is preserved but benefits are restricted.

Q1: Agree with the mechanics?

Q2: Any other options I may have overlooked?

Q3: My particular client at least for now is highly profitable so I will be recommending (1)(b). Any disagreement?

Q4: Has anyone figured out the odds that the client would understand this?

My P.S. for the day: Much of the confusion of PPA is attributable to the application/nonapplication of credit balances. For many plans -- especially those that pay lump sums, the recent Armegeddon will cause most if not all of the FSCOB to be burned.

[FAPInJax]

Your last comment is most interesting. I have had several clients question whether it is worth maintaining any balances at all - EVER! It just creates a lot more work and has many potential pitfalls. They have questioned whether it is possible to structure a statement for their actuary where IF it appears that there is a balance, then immediately burn it to avoid any of the issues.

By the way, the math looked OK and I could not think of any options that you did not. Additionally, there is very little chance of any client understanding the need for all the complexity. I hope the additional contributions you mentioned are deductible under the maximum for 2008?

[zimbo]

I'm wondering whether in a situation where you have enough FSCOB to burn to get you from below 60% all the way up to 80%, are you required to burn it all the way up to 80%? In other words, I don't believe you can stop at 60% and accept the benefit limits if there is enough FSCOB remaining to take you up to 80%.

Of course, you could burn up to 60% and then contribute for the prior year sufficient to get you to 80%.

[david rigby]

In general, mechanics and reasoning looks OK. However, I think the first concern is the AFTAP below 60%. IRC 436(f)(3) indicates a mandatory waiver of Carryover Balance and Prefunding Balance to raise the AFTAP to exactly 60% (unless burning all of such balance is not sufficient to reach 60%). The other possible actions must follow this.

For zimbo's Q, I'm not aware of a requirement to burn/waive any COB or PB where the AFTAP is between 60% and 80%. Do you have a cite otherwise?

[Andy the Actuary]

In general, mechanics and reasoning looks OK. However, I think the first concern is the AFTAP below 60%. IRC 436(f)(3) indicates a mandatory waiver of Carryover Balance and Prefunding Balance to raise the AFTAP to exactly 60% (unless burning all of such balance is not sufficient to reach 60%). The other possible actions must follow this.

For zimbo's Q, I'm not aware of a requirement to burn/waive any COB or PB where the AFTAP is between 60% and 80%. Do you have a cite otherwise?

My understanding is the same as Barrister Rigby's. You are only required to burn balances to reach either the 60% or 80% funding levels. In the example, w/o regard to CB, the AFTAP would only get to 75% so you would only need to burn enough CB to get to 60% if the client is not going to burn enough to get to 75%.

Regarding the blanket "Burn d'em credit balances statement," it would seem doable. I believe the only restriction is that the election to burning occur prior to the filing of Schedule B which doesn't preclude making the election years in advance. The risk you run is that the person giving you direction today may differ from the person in a couple years. As actuary, you would need to take care to assure the strategy is continually communicated. It just seems safer to get the election. Also, note in my example Alternative (1)(b), the client contributes $112,000 more than in Alternative (1)(a) but preserves a net FSCOB of $1.6 million ($2,000,000 - $400,000). In short, don't be too quick to opt for a default election that could turn sour.

PPA has moved us out of the era where you could explain to pension plan neophytes how the game works; you simply have to tell them what to do after you get a sense for what their election would be had they understood what you were talking about.

[ak2ary]

There is a requirement to waive to get to 80% if the plan offers lump sums, but there is no requirement to waive credit balances to get to 60% unless the plan is collectively bargained. So if you have credit balance but not enough to get you to 80% you can allow the plan to drop below 60% and retain your credit balance 436(f)(3)©

[Blinky the 3-eyed Fish]

Ak2, since benefit restrictions under 436(d) apply at 60% (1/2 payment is allowed), why do you not think there is a mandatory waiver to get to 60% for plans that have prohibited payments?

[ak2ary]

That is a good point, wise 3-eyed creature of the deep

The proposed regs (altho not the law IMHO) make the partial lump sum mandatory for plans between 60 and 80% although the law seems to say that plans between 60 and 80% may offer the partial lump sum. Given that, falling below 60% would generate another restriction under d, which would generate a deemed waiver.

Unless final regs do an about face and follow the law, I stand corrected