Communication Tip

[Andy the Actuary]

A plan sponsor whose 2009 FTAP is well below 80% has opted to fund the minimum required contributions. 2009 actual contributions and 2010 quarterly estimates are as follows:

7/15/2009 $ 52,000 (for 2009)

10/15/2009 52,000 (for 2009)

....................=======

....................$104,000

1/15/2010 $ 52,000 (for 2009)

4/15/2010 80,000 (for 2010)

7/15/2010 80,000 (for 2010)

9/15/2010 107,000 (for 2009)

10/15/2010 80,000 (for 2010)

...................=======

...................$ 399,000

In such situations, it is important to stress that the client should not contribute any of their 2010 estimates in 2009. In such case, they would not be able to use the PB that arises from 2009 excess contributions to reduce their 2010 obligation. Consequently, they would only get the immediate value of the reduction in shortfall amortization -- about 1/6 of the contributions. For example, suppose the client decided to make the entire $399,000 in 2009. They would add $240,000 to their PFB which they couldn't use to reduce 2010 contributions (because the 2009 FTAP<80%). The excess would reduce the shortfall by $240,000 which would reduce the amortization by let's say $240,000 / 6 = $40,000. This would reduce each 2010 quarterly installment by $10,000 so they would still have to come up with additional $70,000 for 4/15/2010, 7/15/2010, and 10/15/2010, or $210,000. And the plan sponsor thought they were doing the right thing, which they did, except they forgot that "no good deed goes unpunished."

So much for encouraging plan sponsors to accelerate funding their plans!