1st year CB Plan and PPA

[abanky]

this is a first year CB Plan... I'm allocating 90k to the hypothetical accounts. Pre-ppa, you could match the 412 contribution with the hypothetical allocation... Now I with ppa, i'm coming up with a contribution of 66k.

Anyone know around this problem? am I doing something wrong?

[FAPInJax]

Welcome to PPA!

This is a common occurence with cash balance plans. My understanding is that the only way around it is to use the at-risk rules which generally enable a first year cash balance plan to have a contribution equal to the contribution credit.

[abanky]

so ppa is forcing me to be 73% funded in the first year?

Would I be able to show that I am at risk in the first year on the Schedule B? wouldn't that throw up a red flag?

[Blinky the 3-eyed Fish]

I think filing a Sch B would put you more at risk.

Ye olde PPA funding whipsaw is rearing it's ugly head.

Keep in mind that if your interest crediting rate is the 30-year Treasury Rate or tied to some other index that floats, you have an assumption to make in your valuation. That may help you lessen the whipsaw if you have that flexibility.

I think it might be helpful if you find a seminar or an article about the at-risk rules for 404 and to read 404 of course. You aren't declaring that your plan is at-risk in any way that is adverse. By the way, you will get some different opinions on how these calculations should be done.

[abanky]

I think filing a Sch B would put you more at risk.

i forgot about the schedule sb for 08... haven't gotten that far ahead

[Mike Preston]

By the way, you will get some different opinions on how these calculations should be done.

Do tell!

[AndyH]

I saw bunches of 2008 proposals from afar that assumed the accounts could be funded. People were expecting "technical corrections" to save them.

But apparently Letterman did a "Will it Float" on it the technical corrections "cushion" and it did not float.

Andrew, I bet there are lots of people just dicovering what you have in front of you.

Blinky, many witches need your potions.

[Mike Preston]

About the only area where I've seen disagreement on the way to determine the at-risk amount is vesting. Some take the position that since the plan allows for lump sums and we have to assume that every participant will take a distribution at the end of the valuation year, that we should then attribute 100% vesting to the decrement. Attributing, if you will, some logic to the "at risk" descriptor. Some others believe, having a copy of Sarasen scanned on a microchip embedded behind their left ear, that vesting should be according to the plan's terms on an individual basis without considering the effect such a mass exodus would have. Other than that, Oh Mighty Fish, have you seen other areas of disagreement as to how to determine the at risk TNC?

[abanky]

so may i ask what you guys are doing (those who were like me and didn't know that this would come up)?

[AndyH]

so may i ask what you guys are doing (those who were like me and didn't know that this would come up)?

Upon recognizing this, we stopped doing new cb plans in 2008 until this gets satisfactorily resolved, which it hasn't.

You are using a low crediting rate I assume, right? A higher rate (5.5%-6%), albeit maybe illegal, would solve the problem I think.

Blinky and Mike are discussing an alternative approach using at risk factors for 404 purposes. I don't know how that works with a vanilla CB plan that is assumed to pay lump sums, but I am all ears.

Others have devised 3 year bailout programs where the plan is made whole after about three years. Another approach is to somehow create a past service liability and use the cushion from that. These strike me as excessively high maintenance if a regular DB plan is an alternative.

You can conder using a higher interest credit.

[abanky]

i use the 30 year treasury for all cb plans.

we've decided to put cb plan design on hold as well... at least until congress decides that it's ok to fully fund a plan.

[Mike Preston]

It really isn't very complicated. In essence it boils down to considering the "account balance" as the at-risk TNC. Isn't that what you want? I mean, taken literally, how much would the lump sum be if paid at the end of the year? If that doesn't satisfy the definition of the at-risk rules then I didn't read it very well (anything is possible).

[AndyH]

Thanks Mike. That makes perfect sense. Is this interpretation widely shared? Have any IRS people commented?

Presumably, 404 regs would address this. I'd be interested in knowing the agenda schedule for that if any.

[Mike Preston]

Well, it is certainly one of the items (amongst many) that the ACOPA committees are keeping in focus. I haven't heard anything formal from the IRS on this issue. There are a gazillion other things that fall into the same category. Great fun, huh?

[Guest Sus95]

so may i ask what you guys are doing (those who were like me and didn't know that this would come up)?

Upon recognizing this, we stopped doing new cb plans in 2008 until this gets satisfactorily resolved, which it hasn't.

You are using a low crediting rate I assume, right? A higher rate (5.5%-6%), albeit maybe illegal, would solve the problem I think.

Blinky and Mike are discussing an alternative approach using at risk factors for 404 purposes. I don't know how that works with a vanilla CB plan that is assumed to pay lump sums, but I am all ears.

Others have devised 3 year bailout programs where the plan is made whole after about three years. Another approach is to somehow create a past service liability and use the cushion from that. These strike me as excessively high maintenance if a regular DB plan is an alternative.

You can conder using a higher interest credit.

I read somewhere that there is a "safe harbor" market interest rate for 2008 equal to the third segment rate allowed for funding. Hence, I believe you can actually use 6.43% for 2008 as the interest crediting rate...

[AndyH]

But there is no ceiling, so people that I have spoken to are not willing to guarantee a 6.43% return in this environment with no cap. Would you?

[ScottR]

Thanks Mike. That makes perfect sense. Is this interpretation widely shared? Have any IRS people commented?

Presumably, 404 regs would address this. I'd be interested in knowing the agenda schedule for that if any.

I agree 100% with Mike. For the regs NOT to allow deduction of the 1st year theoretical contributions, they'd have to overturn Code Section 404(o)(2)(B).

[FAPInJax]

OR just interpret the section so that it does not apply to small plans (the at-risk assumption). This is similar to what they have done for EOY valuations and the transition interest segment.

"The IRS actuary verified that his answer is correct, that the transition segment rates are based on the applicable month (i.e. valuation month) only. While the language of 430(h) which references 412(b)(5)(B)(ii)(II) might imply that the 30-year treasury rate involved in the transition is the BOY rate, this is not the position the IRS is taking. "

[Mike Preston]

Frank, what are you quoting from?

[FAPInJax]

This is from a conversation held with an IRS actuary when asked why the posted IRS transition interest segments did not high quality bond rates measured from the BOY (per the law???) but from valuation date.

[Mike Preston]

Having now read the section, I agree with you, Frank, that a more consistent approach would be to use BOY rate for any valuation date. I wonder why they decided to go against the way they previously interpreted the provision?