Required Credit Balance "Burn"

[JAY21]

I thought I had understood that burning the credit balance was only required when it would impact the AFTAP enough to move the AFTAP percent to a less restrictive category (e.g., if it moved you from say 75% to 80%). However, when reading the new 2008 Schedule SB instructions it seems to state that the burn is required if the FTAP from 2007 is less than 80% (even if it didn't move you to a higher category; say from 75% to 78% it would still be required to be burned).

Am I getting that right ? For the most part, I don't think many of our clients (small plans) will want to optionally burn credit balances to improve the AFTAP, so I'm mostly concerned about the "deemed" election to burn when AFTAP % is too low.

So, credit balance always partially/fully burned whenever less than 80% funded in prior year ? Or just when it moves you into a less restricted category (e.g,. 75% to 80%) ?

[Andy the Actuary]

Here is what I found in the August 31, 2007 proposed regulation on underfunded plans:

"However, the deemed reduction applies with respect to this limitation only if the prefunding and funding standard carryover

balances to be reduced are large enough to avoid the application of the limitation. Thus, no reduction of prefunding and funding standard carryover balances is required if the limitation would still apply for a year even if those balances were reduced to zero."

Essentially, if burning does not get you to the 60%, 80%, or 100% threshold, it is not required. Thus, in your example, you would not burn to get from 75% to 78%. As an aside, if that were the case, logically you'd have to burn balances until you got to 100%.

Can you please cite the SB instruction that provides that you burn the FSCOB if even if so doing does not bring you to a threshold.

[david rigby]

IMHO, the PPA language is clear that your burn as much CB to get the plan to a needed threshold level, but don't burn anything if you can't get there. For example, see IRC 436(f)(3).

[Effen]

Just as a point of clarification, I believe the burn is only required to avoid benefit restrictions and not necessarily to get to the next threshold. In other words, if benefit restrictions wouldn't apply because the plan didn't pay lump sums, there would be no requirement to burn COB or PB to get the AFTAP over 80%

prior post

[JAY21]

Andy, I saw that same blurb in the proposed regs and that's what I've always understood the the rule to be. However, the Schedule SB instructions don't appear to say that and even CCH DB answer book when reviewing the line-by-line instructions repeats the same 80% rule.

let me know if you think I'm interpreting these instructions wrong. We're working through the SB right now, my worry is that if you state the FTAP was less than 80% the software (Relius) may not let you apply the carrover CB to minimum funding, but I haven't got that far yet to confirm on the software application.

See attached blurbs from IRS Schedule SB instructions (line 16 and line 35), including CCH's rehash of same instructions.

Credit_Balance_5500_instructions_line_16.pdf

Credit_Balances_PPA_Funding_2.pdf

Credit_Balance_5500_instructions_line_35.pdf

Credit_Balances_PPA_Funding_2.pdf

[Andy the Actuary]

Are there two issues here? (1) avoiding benefit restrictions (2) applying FSCOB to offset contributions.

[JAY21]

Well they are related, but my question is simply do I have to burn a credit balance if doing so does not result in any change in restrictions (e.g., going from 75% FTAP to 78% FTAP).

I agree the regs say you don't have to burn in this situation, but the Schedule SB instructions seem to say you can't use the carryforward credit balance at all if the 2007 FTAP was below 80% (i.e., it doesn't seem to provide the regs exception that if burning the credit balance it doesn't result in a change of restrictions then you don't have to burn it).