Funding Cushion if Plan Amended for HCE accruals

[JAY21]

Do we have any exact details on how the provision works that states that accruals for HCEs within the past 2 years can't be taken into account for the maximum funding cushion.

For example, Plan is frozen 1/1/08 but is later unfrozen by 12/31/08 as client had better year than expected. This is a 1 person plan that has been in effect since 2006 and these are the first amendments to the plan (freeze and unfreeze)

Since the 12/31/07 AB was not impacted by an amendment within the past 2 years do we still get the (1.5)(Funding Target;past svc) but then DON'T add the 2008 normal cost component (due to recent unfreeze within past 2 years) to arrive at the maximum deductible contribution ?

[SoCalActuary]

Do we have any exact details on how the provision works that states that accruals for HCEs within the past 2 years can't be taken into account for the maximum funding cushion.

For example, Plan is frozen 1/1/08 but is later unfrozen by 12/31/08 as client had better year than expected. This is a 1 person plan that has been in effect since 2006 and these are the first amendments to the plan (freeze and unfreeze)

Since the 12/31/07 AB was not impacted by an amendment within the past 2 years do we still get the (1.5)(Funding Target;past svc) but then DON'T add the 2008 normal cost component (due to recent unfreeze within past 2 years) to arrive at the maximum deductible contribution ?

Jay - in your scenario, the result for 2008 is unchanged. You get 150% on 12/07 benefits, and the TNC is not part of the cushion in any event.

However, for 2009, the FT is the AB of 12/31/08, but the cushion is on the AB of 12/31/07. Then you also add the TNC.

For 2010, the FT is the AB of 12/31/09, but the cushion is on the AB of 12/31/07, still.

Finally in 2011, the FT is the AB of 12/31/10, and so is the cushion (assuming you don't mess with the formula in the meantime.)

[JAY21]

Thanks SoCal. That's a great example.

[RLR]

SoCal, If a plan's benefit formula is amended from a flat 80% of comp to 100% effective 1/1/13 and adopted 12/30/13, the FT would be effected on the BOY 1/1/13 val. So, would there be an adjustment to the cushion on the vals for 1/1/13, 1/1/14 and 1/1/15?

[Calavera]

TL calculated for HCEs for cushion purposes will be based on old 80% formula for 1/1/13, 1/1/14, and 1/1/15 valuations.

[tymesup]

Agreed with Calavera. Note that while the Code says two years, the IRS counts it as three.

[RLR]

Thank you for the comments. What if in my example the amendment was adopted 3/15/14. Which valuations would be affected for the cushion adjustment? Logically, the 1/1/13 cushion would be adjusted along with the 1/1/14 and 1/1/15 cushion amounts. At 1/1/16, looking back 2 years the adoption date of 3/15/14 would be included so the 1/1/16 cushion would be adjusted? That affects 4 years and that doesn't make sense. I'm not understanding something and would appreciate anyone who can help.

[tymesup]

There doesn't appear to be any explicit guidance on the subject. Folks on the COPA site are taking the conservative view by agreeing with the IRS counting method.

As a practical matter, the extra cushion usually isn't needed two years later.

Note there is also a debate whether an amendment adopted 3/15/14 could be reflected in the 1/1/13 valuation.

[Calavera]

If amendment was adopted 3/15/14, you will not use it for cushion purposes until 1/1/17 valuation.

BTW, after the Q/A-4 of the 2011 Gray Book a lot of people wouldn't use the amendment adopted 3/15/14 for 1/1/2013 valuation at all.

[RLR]

Thanks for the replies. I'm aware of the 412(d)(2) issue - just trying to get a grip on the number of years the cushion amount has be be adjusted.

[tymesup]

For what it's worth:

2001 Greybook (Q&A 2):

Funding: Application of IRC §412©(8) to IRC §404

Plan A was adopted on January 1, 2000. Based on a preliminary 2000 valuation, the minimum required contribution is $1 million and the maximum deducible amount is $1.4 million. On February 1, 2001, the plan is amended to double benefits, effective on January 1, 2000 and made retroactive to that date. Pursuant to an election under IRC §412©(8), this amendment is reflected in full in the January 1, 2000 valuation. Accordingly, the minimum required contribution increases to $2 million and the maximum deductible limit (if the plan amendment were taken into account) increases to $2.8 million.

What is the maximum tax-deductible contribution?

1) $2.8 million, reflecting the IRC §412©(8) election?

2) $2 million: the greater of the minimum required contribution reflecting the IRC §412©(8) election and the otherwise applicable maximum disregarding the IRC §412©(8) election?

RESPONSE

$2.8 million, since any IRC §412©(8) election made for minimum funding purposes also applies for maximum deduction purposes.

[Calavera]

Good old Pre-PPA days.

[RLR]

Okay. I do appreciate the help. One last clarification - in SoCal's example the amendment was done in 2008, but there was no impact on the FT for 2008 since the plan simply went from a frozen status to unfrozen in the same year. SoCal went on to say that the amendment could be fully recognized on the 2011 val. Is it just this particular fact pattern that resulted in only 2 years of adjustments to the cushion (2009 and 2010)?

[Calavera]

It still the same 2 years after the later of an adoption date or an effective date.

Step 1: later of adoption date or an effective date (12/31/2008 in SoCal's example)

Step 2: add 2 years to the date from Step 1 (12/31/2010)

Step 3: Ther will be no cushion adjustment at valuation date after the date from Step 2 (1/1/2011)

[RLR]

Thanks for all the help!