Burning Carryover Balance

[Guest TammyS]

Running an end of year valuation (12/31/2008). AFTAP for 2008 plan year using 2007 RPA current liability (12/31/2007) is about 124%.

There is a Carryover Balance as of 12/31/2007 of about $88,000. The 2008 minimum contribution is too high for the client (big surprise). Can I burn some of the Carryover Balance to offset the minimum contribution? Or, did an election have to be made by the end of 2008?

[Andy the Actuary]

Running an end of year valuation (12/31/2008). AFTAP for 2008 plan year using 2007 RPA current liability (12/31/2007) is about 124%.

There is a Carryover Balance as of 12/31/2007 of about $88,000. The 2008 minimum contribution is too high for the client. Can I burn some of the Carryover Balance to offset the minimum contribution. Or, did it have to be done by the end of 2008?

Ah, the confusion of PPA. There is a timing difference between burning and applying credit balances. Generally, credit balances are burned to increase certain ratios for purposes such as determining whether or not to establish bases, quarterly contributions apply, or whether you can apply CB in subsequent year. My understanding is plan sponsor must elect to burn balances by close of Plan year. On the other hand, if you want to apply the CB to offset contributions (e.g., not alter AFTAP), then my understanding is plan sponsor must so elect by the time 5500 filed.

[Guest TammyS]

So, Andy, it is your understanding that since we only want to use the Carryover Balance to reduce the minimum contribution, we have until the filing of the Form 5500, etc for this election to be made.

Also, the AFTAP must be at least 80% to use the Carryover Balance. I assume this is looking at the 2008 AFTAP (end of year val using 2007 RPA numbers).

[Andy the Actuary]

So, Andy, it is your understanding that since we only want to use the Carryover Balance to reduce the minimum contribution, we have until the filing of the Form 5500, etc for this election to be made.

Also, the AFTAP must be at least 80% to use the Carryover Balance. I assume this is looking at the 2008 AFTAP (end of year val using 2007 RPA numbers).

Yes, my understanding is that you have until filing due date, including extensions, of 2008 5500. But, according to proposed regs., employer must make formal election to apply. If any disagrees, now is the time to hop right in.

Since virtually all the Plans I value use a beginning of year valuation date, perhaps others could chime in on your second question.

[Blinky the 3-eyed Fish]

BOY val or EOY val doesn't matter, the 80% ratio for determining if you can use the credit balances to reduce this year's minimum contribution is based on the prior year valuation numbers. In this case it would be the 12/31/07 RPA liability over the assets not reduced for any credit balance.

[david rigby]

Tammy, a small comment about terminology.

Andy's answer correctly distinguishes between "burn" and "apply". Also, "waive" is usually a synonym for "burn".

[Andy the Actuary]

Tammy, a small comment about terminology.

Andy's answer correctly distinguishes between "burn" and "apply". Also, "waive" is usually a synonym for "burn".

Excellent point Mr. R and in fact, August 31, 2007 proposed reg. on underfunded plans refers to "reducing balances to avoid restrictions" and "applying balances to offset contributions." Neither "burn" nor "waive" appear in this reg. though many of the posters (including moi) use this terminology interchangeably.

"Burn" was a terminology created by the Bush Adminstration who first proffered their version of PPA. They figured everyone had heard of the "burning" Bush.

[Guest TammyS]

Thanks Andy, david rigby and Blinky for your responses (and correcting my terminology). This topic was my first post although I have been reading this forum for a couple of years.

[flosfur]

....

Also, the AFTAP must be at least 80% to use the Carryover Balance. I assume this is looking at the 2008 AFTAP (end of year val using 2007 RPA numbers).

No, not current or prior year AFTAP but "prior year funding %" has to be 80%+, which for 2008 is simply Valuation Assets (without reduction for carryover balance) divided by CL [line 1b(2) divided by 1d(2)(a) of 2007 Sch B]. This % should be entered on line 16 of 2008 Sch SB.

Since this is based on the prior year %, BOY/EOY valuation issue is irrelevant for applying credit balance towards the minimum.

[Guest TammyS]

....

Also, the AFTAP must be at least 80% to use the Carryover Balance. I assume this is looking at the 2008 AFTAP (end of year val using 2007 RPA numbers).

No, not current or prior year AFTAP but "prior year funding %" has to be 80%+, which for 2008 is simply Valuation Assets (without reduction for carryover balance) divided by CL [line 1b(2) divided by 1d(2)(a) of 2007 Sch B]. This % should be entered on line 16 of 2008 Sch SB.

Since this is based on the prior year %, BOY/EOY valuation issue is irrelevant for applying credit balance towards the minimum.

Thanks flosfur. I keep using the wrong terminology on this stuff.

[JAY21]

For purposes of applying the Credit Balance against minimum funding requirements, if your prior year Val funded % is LESS than 80% then you cannot use the credit balance for funding no matter what ?

What if such "deemed" burn of the Credti Balance for minimum funding does not result in increasing the AFTAP % (used for distribution purposes) sufficiently to move the plan into a lesser distribution restriction category (e.g,. 74% AFTAP to say 77% AFTAP), then do you still have to burn the CB for minimum funding purposes ?

I guess I'm trying to figure out the interaction, if any, between applying (burning) CB for minimum funding purposes and how the AFTAP % (used for distribution restrictions) play into that, if at all, or if the CB for minimum funding purposes ONLY looks at the flat 80% prior Val funded % threshold and if less than that can NEVER be used regardless of it possible negligible impact on AFTAP/benefit restrictions.

[Andy the Actuary]

The mandatory burning pertains to removing benefit restrictions under 436. To my knowledge, there is no mandatory burning under 430 to get to a status where you can apply the credit balances to reduce funding, avoid quarterly contributions, or reduce the funding base..

[JAY21]

So if a plan is less than 80% funded in prior year (AVA assets / fdg target) then you cannot use the credit balance to offset the minimum funding but that doesn't "burn" the credit balance per se. So then it just continues to carried forward until such time as you either optionally elect to burn it (for AFTAP), or are required to burn it (if it would improve AFTAP enough to get to a better category), OR until the prior year funded % is 80% or better and then can apply it to minimum funding.

Is this right ? Just seems weird that the credit balance might still exist but can't be used for anything (unless you elect or are required to burn it for AFTAP purposes).

[Andy the Actuary]

Weird? You ain't see weird.

2009 FT = 1,000,000

2009 Assets = 980,000

2009 PFB= 300,000

AFTAP= 98%

But, (980,000 - 300,000) / 1,000,000 = 68% so can't use PFB in 2010

2010 FT = 1,200,000

2010 Assets = 1,400,000 [made huge contribution that was not added to PFB]

2010 PFB = 200,000 [burnt 100,000 of PFB just for giggles]

TNC = 150,000

(1,400,000 - 200,000) / 1,200,000 = 100%, so 2010 minimum contribution = 1,200,000 - (1,400,000 - 200,000) + 150,000 = 150,000

So even though assets exceed FT by 200,000, must make contribution of 150,000 because cannot use PFB.

However, if you burn $150,000 of PFB as of 2010, you would have as a 2010 minimum 1,200,000 - (1,400,000 - 50,000) + 150,000 = 0, so you can effectively use the PFB.

You say neether, I say nyether . . .

[JAY21]

That would be a weird result but I thought Blinky mentioned in the above post that you didn't have to reduce the assets by the credit balance for the 80% determination to apply CB to minimum funding, or is that just for 2008.

[Andy the Actuary]

It is only for 2008. However, as of 1/1/2008 (for calendar year plans), there is no PFB to subtract so it is somewhat of a moot point. Thereafter, we have:

D. Use of Prefunding Balance and Funding Standard Carryover Balance To Offset Minimum Funding Requirements for a Year

The proposed regulations would provide that the employer may elect to use some or all of the prefunding balance or funding standard carryover balance to offset the otherwise applicable minimum required contribution for a plan year, provided that the plan met a funding percentage threshold for the preceding plan year. Specifically, an employer is permitted to make such an election only if the plan’s prior year funding ratio was at least 80 percent. For this purpose, the plan’s prior year funding ratio generally is a fraction (expressed as a percentage), the numerator of which is the value of plan assets on the valuation date for the preceding plan year, reduced by the amount of any prefunding balance (but not the amount of any funding standard carryover balance), and the denominator of which is the funding target of the plan for the preceding plan year (determined without regard to the atrisk rules of section 430(i)(1)).

The proposed regulations would provide a transition rule to determine a plan’s prior year funding ratio for the first effective plan year. Under this transition rule, the current liability for the plan for the pre-effective plan year is substituted for the funding target of the plan for that plan year. In addition, the transition rule provides that the value of plan assets is determined under section 412©(2) as in effect for that preeffective plan year, except that the value of plan assets must be limited so that it is not less than 90 percent and not more than 110 percent of the fair market value of plan assets.

[JAY21]

Man this stuff is fun.........Good info though.

[Andy the Actuary]

Man this stuff is fun.........Good info though.

Yes, almost as much fun as undergoing a root canal procedure.

[flosfur]

That would be a weird result but I thought Blinky mentioned in the above post that you didn't have to reduce the assets by the credit balance for the 80% determination to apply CB to minimum funding, or is that just for 2008.

Yes, that is for 2008 only because, for purposes of using credit balances towards minimum required, assets are reduced for "prefunding balance" only [see S430(f)(4)©]. Since there is no prefunding balance @ BOY of 2008 PY, assets are not reduced for credit balances. Talk about convoluted rules!

[zimbo]

Actually you reduce the assets ONLY by pre funding balances. You do NOT reduce the assets by carryover balances.

[Mike Preston]

For this purpose, anyway.