AFTAP for new plan effective 1/1/09

[YankeeFan]

A plan sponsor adopts a new defined benefit plan effective 1/1/09. The plan's benefit formula grants prior service credit. As such, each eligible participant has an accrued benefit as of 1/1/09. The purpose of granting prior service credit is to create a cushion amount and increase the maximum deductible contribution. Lets assume the following:

Funding Target as of 1/1/09: 200,000

Target Normal Cost for 2009: 0

Assets as of 1/1/09: 0

Shortfall Amortization Balance as of 1/1/09: 200,000

Since the plan grants prior service credit, the benefits are accrued as of 1/1/09 and there is no target normal cost for the year. In this case, each participant accrues 1/10 of the 415 dollar limit as of 1/1/09.

Two questions -

(1) Does it make sense that the Minimum Required Contribution is the amortization of the $200,000 shortfall amortization balance (or lets say about $40,000)? If the plan had not granted prior service credit, the Minimum Required Contribution would be $200,000.

(2) The AFTAP as of 1/1/09 is 0% (0/200,000). Is there an exception for new plans or would the plan have benefit restrictions the first year?

[SoCalActuary]

A plan sponsor adopts a new defined benefit plan effective 1/1/09. The plan's benefit formula grants prior service credit. As such, each eligible participant has an accrued benefit as of 1/1/09. The purpose of granting prior service credit is to create a cushion amount and increase the maximum deductible contribution. Lets assume the following:

Funding Target as of 1/1/09: 200,000

Target Normal Cost for 2009: 0

Assets as of 1/1/09: 0

Shortfall Amortization Balance as of 1/1/09: 200,000

Since the plan grants prior service credit, the benefits are accrued as of 1/1/09 and there is no target normal cost for the year. In this case, each participant accrues 1/10 of the 415 dollar limit as of 1/1/09.

Two questions -

(1) Does it make sense that the Minimum Required Contribution is the amortization of the $200,000 shortfall amortization balance (or lets say about $40,000)? If the plan had not granted prior service credit, the Minimum Required Contribution would be $200,000.

(2) The AFTAP as of 1/1/09 is 0% (0/200,000). Is there an exception for new plans or would the plan have benefit restrictions the first year?

1. yes and yes

2. yes, there is a restriction on distribution under 436d. But so what? The plan doesn't have any money to pay the benefit.

[Guest Mike Melnick]

I agree that there would be a restrictions for lump sums distributions under 436(d).

It is interesting to note that the lump sum restriction is the only one that applies here. There is no restriction to benefit accruals, or plan amendments, because of the 5 year exception for new plans under 436(g).