Treatment of Funding Deficiency

[AndyH]

Calendar year plan has a funding deficiency in 2007, corrected in December 2008.

How is the funding shortall calculated as of 1/1/2008, by including the amount due for 2007 or not?

Similar questions about how to calculate the quarterly for 2008 and 2009 - based on target nc + amort for 2008 including deficient receivable?

The proposed reg seems to say that the deficiency is not part of the quarterly computation for the next year, but the question remains as to how the unpaid amount is handled for purposes of the determination of shortfall.

Opinions please. Thanks.

[Blinky the 3-eyed Fish]

Considering the funding deficiency would mean treating it as a negative credit balance and increasing the adjusted value of the assets, I don't believe this is the correct treatment. It's not mentioned anywhere in the Code or Prop. Regs. to do this, so by default I wouldn't. It too makes sense logically not to do this.

[AndyH]

Thanks for the comments.

Here is a simple example. Calendar Year Plan effective in 2007 has required contribution of $100,000 for 2007 and funds it late, in December of 2008.

Now we're doing a 2008 valuation.

Assume the TNC is $150,000 and the Target Liability is $110,000 (basically the first year accrual plus interest).

I think it is clear that the amount due for 2008 equals the 2007 deficiency increased with interest to the deposit date plus the 2008 TNC plus the 2008 shortfall amortization.

I think you are saying that the shortfall amortization is the amortization of $110,000 over 7 years, so that my 2008 contributon becomes:

1. The original $100K plus interest

2. Amortization of $110,000 over 7 years.

3. The TNC.

Note that 2 is essentally double counting the deficiency (plus one year of interest), isn't it? I think you are right, that nothing says otherwise, but this doesn't make much sense to me.

I think this approach would also increase the quarterly due for 2008 and 2009 and that seems counterintuitive to me also.

[Blinky the 3-eyed Fish]

I wouldn't say double counting since the amortization is over 7 years, but I understand your point. To include it in the assets when the contribution has not been made seems counterintuitive to me. The amortization of the shortfall is designed to alleviate the shortfall over that seven years. Not counting the funding deficiency is merely speeding up the process a bit that first year.

[AndyH]

Thanks.

Reluctantly agree.

[david rigby]

Only "guidance" I've seen is 2009 Gray Book, Q&A 1.

[Blinky the 3-eyed Fish]

Care to elaborate?

[david rigby]

(Apparently, copy and paste requires an interim temporary document.)

Gray Book Q&A 2009-1 Funding: PPA: Ordering Rules for Contributions

Under pre-PPA rules, contributions made within 8½ months after the end of a plan year were permitted to be designated as made for the current plan year or the prior plan year.

Proposed regulation §54.4971©-1©(1) states that an unpaid minimum required contribution (UMRC) is any contribution for a plan year that is not paid by the due date under §430(j)(1) - which is 8½ months after the end of the plan year. The ordering rule under §4971©(4)(B) and prop. reg. §54.4971©-1(d)(2)(ii) provides that a contribution will first be attributed to any earlier plan year for which there is any UMRC. There is also an ordering rule in §430(j)(3)(b)(iii) and prop. reg. §1.430(j)-1©(2)(ii) for quarterly installments. This rule specifies that contributions are first credited against the earliest unpaid quarterly installments.

Consider the following example. A calendar year plan with a January 1 valuation date is subject to quarterly contributions during 2009 but was not subject to the quarterly contribution requirement for 2008. The 2009 required annual payment for determining the quarterly payment is $4 million, so that the amount of each 2009 required installment is $1 million. As of the beginning of 2009, $3 million of the 2008 minimum required contribution has not yet been paid. The effective interest rate (EIR) for 2008 is 6%.

a) As of April 15, 2009, $3 million of the 2008 minimum required contribution remains outstanding. The sponsor makes a $1 million contribution on April 15, 2009. May the sponsor designate this contribution as either a 2008 plan year contribution or a 2009 plan year contribution and, if so, how and when must this designation be made?

b) The sponsor elects to designate the April 15, 2009 contribution as a 2008 plan year payment. As a result, as of July 15, 2009, the sponsor has not yet paid the April 15, 2009 quarterly payment. The sponsor makes a $1 million contribution on this date and designates it for the 2009 plan year. How is this contribution treated for purposes of calculating the late quarterly interest charge?

c) The sponsor did not make the full 2008 minimum required payment. As of October 15, 2009, the 2008 unpaid minimum required contribution (UMRC) is $2,072,501 million ($3 million less the $1 million paid on April 15, 2009, discounted back to January 1, 2008). The sponsor makes a $1 million contribution on this date. How is this contribution applied?

d) If a plan that is subject to quarterly installments has not yet satisfied the minimum required contribution for the prior plan year, and no specific designation has been received as of the filing of the applicable Schedule SB, is it reasonable to credit contributions in the following order (for a calendar plan year)?

1) any unpaid minimum contribution for years prior to the immediately preceding year

2) any unpaid quarterly installments for the immediately preceding plan year

3) the first quarterly installment (4/15) for the current plan year

4) the second quarterly installment (7/15) for the current plan year

5) the remaining (if any) required contribution for the prior plan year (9/15) – this item would take precedence over items 3 and 4 for contributions made on or after 9/15

6) the third quarterly installment (10/15)

7) the final quarterly installment (1/15 of the next year)

8) the remaining (if any) required contribution for the plan year (9/15 of the next year)

RESPONSE

a) Yes. Because the relevant contribution is not yet an UMRC, the sponsor may designate the plan year to which a contribution is applied for minimum funding purposes by notification to the enrolled actuary in order for the actuary to report the designation as part of the filing of Schedule SB for the applicable year.

b) The July 15, 2009 contribution is applied to the April 15, 2009 required quarterly payment as this is the earliest quarterly payment date for which a required installment has not yet been paid. The late interest calculation for this payment ceases, while a late interest calculation for the July 15, 2009 quarterly begins.

c) After September 15, 2009, the plan has a 2008 UMRC. All contributions after this date must first be applied against this UMRC until it is fully satisfied. The $1 million payment is discounted back to January 1, 2008 at the 2008 EIR, reducing the 2008 UMRC to $1,171,635.

d) This is a reasonable method for ordering contributions, but whether it is the only reasonable method for ordering depends on the actual contribution dates.

The above Response is a summary, prepared by representatives of the Program Committee, of the oral responses to the question posed to certain staff members of the Treasury and IRS, which represent only personal views of the individuals who provided them. Accordingly, the Response does not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any taxpayer for any purpose.

Copyright © 2009, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the CD-ROM for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

[AndyH]

Thank you. Some of this is very helpful. Some adds more questions to the pile.

[dmb]

Thanks for the comments.

Here is a simple example. Calendar Year Plan effective in 2007 has required contribution of $100,000 for 2007 and funds it late, in December of 2008.

Now we're doing a 2008 valuation.

Assume the TNC is $150,000 and the Target Liability is $110,000 (basically the first year accrual plus interest).

I think it is clear that the amount due for 2008 equals the 2007 deficiency increased with interest to the deposit date plus the 2008 TNC plus the 2008 shortfall amortization.

I think you are saying that the shortfall amortization is the amortization of $110,000 over 7 years, so that my 2008 contributon becomes:

1. The original $100K plus interest

2. Amortization of $110,000 over 7 years.

3. The TNC.

Note that 2 is essentally double counting the deficiency (plus one year of interest), isn't it? I think you are right, that nothing says otherwise, but this doesn't make much sense to me.

I think this approach would also increase the quarterly due for 2008 and 2009 and that seems counterintuitive to me also.

I have a similar situation. With regards to the bold portion above, what interest should the 2007 deficiency be brought up with and from what date?

Thanks.

[SoCalActuary]

I have a similar situation. With regards to the bold portion above, what interest should the 2007 deficiency be brought up with and from what date?

Thanks.

I believe the 2008 effective rate is the right answer.

[AndyH]

I could very well be wrong (I have not finished this and it is only from memory) but I thought that the 2007 FSA rate was applicable. Unless SOCAL is sure, you should look this up - it is in the proposed jungle of regs.

[AndyH]

Took a look.

The end of the proposed 430 regulations has a "PART 54 - Excise Taxes" , I think the cite is 54.4971©-(1)©(2) and (d)(2)(i)(B) says the correction to a pre-PPA funding deficiency is "increased with interest to the end of the pre-effective plan year to the date of the contribution at the plan's valuation interest rate for the pre-effective plan year."

Judge the context for yourself, but I think this says you use the 2007 FSA rate. It is page 65 of the version I happen to have, near the ordering rules for 4971.

[SoCalActuary]

Thanks for the research.

Is there any reference in the current 430 reg's? How about SB instructions?

Also, it is interesting that a funding waiver pre-PPA used 175% Federak Mid-term rates. But a funding deficiency appears to go forward only on the valuation interest rate.

[dmb]

Took a look.

The end of the proposed 430 regulations has a "PART 54 - Excise Taxes" , I think the cite is 54.4971©-(1)©(2) and (d)(2)(i)(B) says the correction to a pre-PPA funding deficiency is "increased with interest to the end of the pre-effective plan year to the date of the contribution at the plan's valuation interest rate for the pre-effective plan year."

Judge the context for yourself, but I think this says you use the 2007 FSA rate. It is page 65 of the version I happen to have, near the ordering rules for 4971.

Thanks. Its also on page 1416 of Volume 2 of the 2009 CCH books.