Prefunding Balances

[Effen]

1.430(f)-1(b)(3) Adjustments for investment experience. --In determining a plan's prefunding balance under paragraph (b)(1) of this section or a plan's funding standard carryover balance under paragraph (b)(2) of this section as of the first day of a plan year, the balance must be adjusted to reflect the actual rate of return on plan assets for the preceding plan year. ...

1.430(f)-1 Example 1 ... (iii) The excess of employer contributions for 2008 over the minimum required contribution for 2008, as of the valuation date, is $42,198 ($142,198 less $100,000). Accordingly, the increase in Plan P's prefunding balance as of January 1, 2009, cannot exceed $44,730 (which is the excess contribution of $42,198 adjusted for 12 months of interest at an effective interest rate of 6%).

(iv) Furthermore, if Sponsor S does not elect to apply any portion of the funding standard carryover balance toward the minimum contribution in 2008, the funding standard carryover balance as of January 1, 2009, is $25,500 (which is the funding standard carryover balance as of January 1, 2008, adjusted for investment experience at an effective interest rate of 2%).

They seem to be using the actual rated to bring the COB forward (2%), and the effective rate (6%) to bring the PB forward? What am I missing?

[Andy the Actuary]

IRC 430(f)(6)(B) says adjust the pre-funding balance as 1/1/2009 for excess contributions made during 2008 by the effective rate determined as of 1/1/2008. This is consistent with discounting the contributions to 1/1/2008 at the effective rate.

IRC 430(f)(8) says to increase both the FSCOB and pre-funding balance from 1/1/2008 to 1/1/2009 using the actual rate of return during 2008.

The example could have been worded better (so what else is new?).

So, lets say as of 1/1/2009 we have an FSCOB of 25,000, Pre-Funding Balance of 10,000, effective rate of 6%, actual rate of 2% during 2009, and excess contributions during 2009 of 4,000

Then, as of 1/1/2010, FSCOB = 25,000 x 1.02 and

Pre-Funding Balance = 10,000 x 1.02 + 4,000 x 1.06

[Effen]

So, now this all makes perfect sense (not!) ...

Only the PB that existed on the first day of the valuation date gets brought forward at the actual earnings rate. The PB that is created, or the amount of the increase, due to contributions made for the current year, get brought forward at the effective rate.

That kind of makes more sense. I had several clients who made large contributions in December and created pre-funding balances. It didn't make sense that I would need to discount these to the first day of the year at the effective rate, then bring them forward at the actual rate (-30%). You are saying that the actual rate of return for 2008 doesn't really impact the "value" of amounts deposited for the 2008 plan year.

So, for example: 1/1/2008 MRC = 0, Max Ded = $1 million. Effective rate 6%, actual return for 2008 -30%.

Plan Sponsor deposits $25,000 on 7/1/2008 for 2008 and elects to increase the PB.

At 1/1/2009 the PB = 25,739 (25000 * 1.06^.5)

NOT 16,998 which would be the 25,000 discounted to 1/1/2008 at effective, then accumulated to 1/1/09 at actual rate

(25,000 / 1.06^.5 * (1-.30))

BIG difference.

Do I have that right?

[Andy the Actuary]

So, now this all makes perfect sense (not!) ...

Only the PB that existed on the first day of the valuation date gets brought forward at the actual earnings rate. The PB that is created, or the amount of the increase, due to contributions made for the current year, get brought forward at the effective rate.

That kind of makes more sense. I had several clients who made large contributions in December and created pre-funding balances. It didn't make sense that I would need to discount these to the first day of the year at the effective rate, then bring them forward at the actual rate (-30%). You are saying that the actual rate of return for 2008 doesn't really impact the "value" of amounts deposited for the 2008 plan year.

So, for example: 1/1/2008 MRC = 0, Max Ded = $1 million. Effective rate 6%, actual return for 2008 -30%.

Plan Sponsor deposits $25,000 on 7/1/2008 for 2008 and elects to increase the PB.

At 1/1/2009 the PB = 25,739 (25000 * 1.06^.5)

NOT 16,998 which would be the 25,000 discounted to 1/1/2008 at effective, then accumulated to 1/1/09 at actual rate

(25,000 / 1.06^.5 * (1-.30))

BIG difference.

Do I have that right?

Your example is consistent with how I read that discombobulation affectionately known as the PPA of ought six. I find it much easier to look to the IRC for the basic nuts and bolts. Far fewer words to absorb than the helpful 80 page 6-point font IRS regs. Further confusion stemmed from there being no pre-funding balance as of 1/1/2008, which is why I chose 1/1/2009 for my example.

[tymesup]

Just to make sure I understand this, is the 25,000 deposited on 7/1/08 discounted back to 1/1/08 and then brought forward to 1/1/09, both at the effective rate of 6.00%? Same answer of 25,739, but handles the general case.

[Andy the Actuary]

Just to make sure I understand this, is the 25,000 deposited on 7/1/08 discounted back to 1/1/08 and then brought forward to 1/1/09, both at the effective rate of 6.00%? Same answer of 25,739, but handles the general case.

That's it. PPA appears to have taken the FSA from an end-of-year-balance to a beginning-of-year-balance approach. Under the pre-PPA FFA, interest was credited on contributions from the date of contribution to the end of the year. Now, contributions are discounted back to the valuation date. Then, when brought forward (at the effective rate), you end up in the same place. The major difference is now you make a choice of whether you add the contributions to the pre-funding balance. I guess you could do this in the past by making but not claiming the contribution. The pre-PPA way worked fine. No doubt as time passes and we numb, we'll learn to love the new way!

[tymesup]

But it was all right, everything was all right, the struggle was finished. He had won the victory over himself. He loved Big Brother.

[mwyatt]

Of course, the reality for 2008 is going to be actual investment return of -20-40%. Guess that this makes sense in some sort of way, but hard to explain why someone dumping in additional funds in December 2008 after the damage was already done gets the additional funds lopped off due to prior investment losses.

Great that we all get to figure out PPA in the midst of extraordinary financial times for sure.

[Effen]

Of course, the reality for 2008 is going to be actual investment return of -20-40%. Guess that this makes sense in some sort of way, but hard to explain why someone dumping in additional funds in December 2008 after the damage was already done gets the additional funds lopped off due to prior investment losses.

NO, I think that is the point. The amounts deposited for 2008 that go towards the PB DON'T share in the actual 2008 investment return. Only the original COB & PB get the market rate. Amounts deposited for 2008 get brought forward (and back) at the effective rate only.

At least that is what I think today

[Andy the Actuary]

An operational question:

Calendar year plan. 2008 excess contributions = 100,000; 2008 effective rate=6%. We will add to 2009 PFB 106,000 as of 1/1/2009. However, on Schedule SB we will report in item 11a 100,000 and in item 11b 6,000. So, the question is should the emloyer election read:

(a) elects to add $100,000 of 2008 excess contributions and interest to 2009 PFB?

(b) elects to add $106,000 of 2008 excess contributions including interest to 2009 PFB?

I'm guessing (a) is correct though it sounds peculiar because you're adding $106,000. I say (a) is correct because you cannot add to PFB more than line 38.

[david rigby]

I vote a. It's clearer.

[Andy the Actuary]

Here's what I'm pondering:

"I elect for the Plan’s Enrolled Actuary to add $54,420 of the 2008 excess contributions (of $85,948) and interest of $2,950, determined at the 2008 effective interest rate of 5.42%, for a total of $57,370 to the Prefunding Balance as of 1/1/2009. I understand that this election is made unconditionally and irrevocably."