2009 AFTAP and reducing balances to avoid restrictions

[Guest TammyS]

Need to do a 2009 AFTAP for a calendar year plan by 3/31/2009. The 2008 AFTAP was 80.5%. If we do not prepare a 2009 AFTAP by 3/31, the 2008 AFTAP reduces to 70.5% and the client cannot pay out lump sums starting 4/1 (since under 80%). Assume that the client wants to pay out the lump sum benefits in 2009 for this example.

I believe we have until 12/31/2009 to have the client make an election to reduce some or all of the carryover balance as of 1/1/2009 to get to 80%. However the 2009 AFTAP has to be done by 3/31/09. Here are a few questions/thoughts on this issue:

Does the client have to make the election to reduce some or all of the carryover balance by 3/31/09 so that the 2009 AFTAP can show 80%?

If so, the amount to reduce the balance on the election could be different that what actually happens due to the discounting of the 2008 contributions (affecting the prefunding balance). What if the 2009 AFTAP then goes below 80% using the actual dates on the contributions? Can the election be redone and and effective retroactively?

This client should have his 2008 contributions completed in March. However, if not, I assume you can estimate what the client will put in for 2008. This would also affect the 2009 AFTAP.

The carryover balance has to be adjusted from 1/1/2008 to 1/1/2009 to reflect the actual rate of return in 2008 (obviously the carryover balance will be reduced in most, it not all, cases).

Can the client elect to reduce the carryover/prefunding balance so that it's, say, 83% to allow for some room for the different dates of the 2008 contributions? Or does it have to be at the exact threshold amount?

I appreciate any help on this.

[Guest RBlaine]

We were allowed to use expected 2007 contributions to determine the 2008 AFTAP, but I think 2009+ AFTAPs have to be determined based on contributions and/or elections made by the date that the AFTAP is calculated. The AFTAP can be revised later if additional contributions and/or elections are made.

In addition, I think any waiver of the credit balance must be in writing, irrevocable and a specific amount. Therefore, an election to waive $500 cannot be changed to a lower amount when it is later determined that only $430 was needed to get to 80%.

[Andy the Actuary]

We were allowed to use expected 2007 contributions to determine the 2008 AFTAP, but I think 2009+ AFTAPs have to be determined based on contributions and/or elections made by the date that the AFTAP is calculated*. The AFTAP can be revised later if additional contributions and/or elections are made.

In addition, I think any waiver of the credit balance must be in writing, irrevocable and a specific amount. Therefore, an election to waive $500 cannot be changed to a lower amount when it is later determined that only $430 was needed to get to 80%.

* See discussion on range certification and then weigh in if appropriate: http://benefitslink.com/boards/index.php?showtopic=41595

[mwyatt]

Have you actually seen what happens to 2009 lump sums under 417 if you're using the December rate? Fire up the calculations and see what the lump sum comes out to based on November 2008, then December 2008 rates. Modest 30-35% increase in lump sums generated. Amazing what happens when the 30-year rate gets pegged below 3%...

Restrictions in 2009 on lump sum payments may not exactly be the worst thing in the world for a plan's health, coupled with asset losses.

[Guest TammyS]

Have you actually seen what happens to 2009 lump sums under 417 if you're using the December rate? Fire up the calculations and see what the lump sum comes out to based on November 2008, then December 2008 rates. Modest 30-35% increase in lump sums generated. Amazing what happens when the 30-year rate gets pegged below 3%...

Restrictions in 2009 on lump sum payments may not exactly be the worst thing in the world for a plan's health, coupled with asset losses.

I'm glad we have a 2 month look back (rather than 1) for all of our calendar year plans.

Any thoughts on the first few paragraphs of the initial question?

[Andy the Actuary]

For distributions in 2009, Nov = 5.24, 5.69, 5.37; Age 35 def annuity to 65=29.09

Dec = 4.41, 4.57, 4.27; age 35 def annuity to 65=43.77

%increase = 50%

To quote the late, great Samuel F. B. Morse, "What hath God wrought?"

What PPA is demonstrating is that any actuarial projections beyond the current year are meaniful for only coctail conversation.

[david rigby]

Using homemade spreadsheet, I get different DAF values than Andy, but similar relationship.

[Andy the Actuary]

Using homemade spreadsheet, I get different DAF values than Andy, but similar relationship.

I assumed no pre-retirement mortality. Does that help?

[david rigby]

I assumed no pre-retirement mortality. Does that help?

It helps much! With that change, my result:

DAF(Nov) = 29.083

DAF(Dec) = 43.82

[Guest TammyS]

Below is a subset of original question. Any comments on this?

Need to do a 2009 AFTAP for a calendar year plan by 3/31/2009. The 2008 AFTAP was 80.5%. If we do not prepare a 2009 AFTAP by 3/31, the 2008 AFTAP reduces to 70.5% and the client cannot pay out lump sums starting 4/1 (since under 80%). Assume that the client wants to pay out the lump sum benefits in 2009 for this example.

I believe we have until 12/31/2009 to have the client make an election to reduce the carryover balance and some of the prefunding balance as of 1/1/2009 to increase the AFTAP to 80%. However the 2009 AFTAP has to be done by 3/31/09.

Does the client have to make the election to reduce some or all of the carryover/prefunding balance by 3/31/09 so that the 2009 AFTAP can show 80%? I also read in the proposed regulations about a deemed election to avoid restrictions.

[Guest RBlaine]

Below is a subset of original question. Any comments on this?

Need to do a 2009 AFTAP for a calendar year plan by 3/31/2009. The 2008 AFTAP was 80.5%. If we do not prepare a 2009 AFTAP by 3/31, the 2008 AFTAP reduces to 70.5% and the client cannot pay out lump sums starting 4/1 (since under 80%). Assume that the client wants to pay out the lump sum benefits in 2009 for this example.

I believe we have until 12/31/2009 to have the client make an election to reduce the carryover balance and some of the prefunding balance as of 1/1/2009 to increase the AFTAP to 80%. However the 2009 AFTAP has to be done by 3/31/09.

Does the client have to make the election to reduce some or all of the carryover/prefunding balance by 3/31/09 so that the 2009 AFTAP can show 80%? I also read in the proposed regulations about a deemed election to avoid restrictions.

I think you have to calculate the AFTAP with the elections made at the time. If your AFTAP turns out to be 74% and reducing your COB would get you to 84%, you are deemed to reduce your COB by the amount needed to get to 80%, only. I think I might still have the employer make an affirmative election of the amount so they know what's going on. The danger here is that, if you have a written election to reduce the COB by $5000 and a data error (or something) would have changed the FT so that only $4000 needed to be used, you are probably stuck with the $5000 reduction.

If reducing your COB would get you to 79%, there is no deemed reduction.

[Guest TammyS]

RBlaine.

You stated "you are deemed to reduce your COB by the amount needed to get to 80%". So the client doesn't actually have to make the election and you can show 80%?

[Guest RBlaine]

RBlaine.

You stated "you are deemed to reduce your COB by the amount needed to get to 80%". So the client doesn't actually have to make the election and you can show 80%?

That is what I think I think...

Your original calcs might show

FT 1,000,000

Assets 850,000

COB 100,000

AFTAP = 75%

Absent any election/prior year contribution by the employer; the deemed burn occurs and PRESTO!!

FT 1,000,000

Assets 850,000

COB 50,000

AFTAP 80%

Anyone disagree? The problem with trying to simplify situations is that real life doesn't always end up that simple.

I would make sure my AFTAP communication included an explanation of the Credit Balance reduction.