Trigger for Lump Sum Payout Restriction

[Guest DBPension]

Hi, I'm new to this forum and am trying to get clarification on the EXACT calculation of the funding ratio that triggers a Lump Sum Payout restriction in a single employer Defined Benefit Plan (with the Plan on a calander year basis). My research tells me (in the 2006 PPA) that if funding ratios are below 60%, no Lump Sum can be paid, and if the funding ratio is between 60 & 80% only 50% of the plan benefits can be paid out in a lump sum. What is not clear to me is what defines "funding ratio" for THIS purpose, and what is the valuation date for the assets & liabilities in THIS calculation.

When I look at the actuarial schedule B that accompanies the IRS 5500 filing, it appears that the funding ratio is at the BEGINNING of the plan year (for what its worth, company 10-k filings also seem to use BEGINNING of Plan year asset & liability valuation dates in the section on pension funding ratios).

Example: The IRS 5500 for "Plan Year" 2007 was filed in Sept. 2008. In this filing, the asset & liability valuation dates for the funding ratio calculation was the BEGINNING of the Plan year (1/01/07). Similarly, for plan year 2008 (with the yet to be completed 5500 filing later in 2009), I'm assuming that 1/01/08 (the BEGINNING of the 2008 Plan Year) will be the valuation date for the funding ratio calculation. If these BEGINNING of year dates are used (in the funding ratio calculation) for the purpose of Lump Sum restrictions, since the stock market didn't collapse until the 3-rd quarter of 2008, it would appear that 1/09/09 would be the FIRST time that the big stock market drop would come into play, and THIS corresponds to the Plan Year 2009 filing completed in 3-rd quarter 2010.

So here is my conumdrum .... Why am I seeing articles that say these Lump Sum restrictions are happening NOW (for 2009 payouts) if the relavent funding ratio uses a BEGINNING of year valuation date 1/01/08 (not 1/01/09) for the 2008 Plan Year and the big stock market drop would not yet be reflected?

Bottom line ..... does the big drop in the stock market in starting in the 3-rd quarter of 2008 FIRST impact funding ratios associated with 2009 or 2010 Lump Sum payouts?

Thanks for any clarification you can provide

[Effen]

Yes

I know it sounds easy, but it is fairly complex. To will try to simplify.

Let’s assume a plan year beginning 1/1/2009. If the actuary can't (or doesn't want to) certify the actual 2009 funded status (AFTAP) prior to 4/1/2009, they will use the 2008 AFTAP, minus 10%. They must certify the actual 2009 AFTAP prior to 10/1/2009 or the plan is deemed to be less than 60% funded.

So, let’s say 2008 AFTAP was 95% and therefore no restrictions were in place for 2008. You come to 4/1/09 and think your 2009 AFTAP will be around 55%. If the actuary does not certify the 2009 prior to 4/1, it is deemed to be the 2008, minus 10% or 85% and no restrictions will be in effect until 10/1/09 or whenever the actual 2009 is certified. Once the actuary certifies the 2009 AFTAP, benefit restrictions will be in effect starting on that date.

Now let’s say the 2008 AFTAP was 85%. No cert is done on 4/1/09 so the 2009 is deemed to be 75% and benefit restrictions apply on 4/1/09. Then, on 10/1/09 the actuary certifies the actual 2009 AFTAP at 55% and all lump sums are stopped and the plan is frozen.

There are LOTS of complications with prefunding balances and carry over balances that make this very complex, but there isn't enough time/space to cover the details.

Basically, the 2009 AFTAP drives the 2009 benefit restrictions, but there are times when the prior year's AFTAP is used.

[david rigby]

Good overview.

In addition, the 2008 AFTAP is deemed to be applicable for the first 3 months of 2009 (unless it is actually certified in that time).