Excess Contributions

[Andy the Actuary]

Calendar Year Plan has 2008 quarterly contribution requirement of $50,000. 2008 contribution requirement is $300,000. Plan also has substantial FSCOB which could be applied to take care of $300,000 minimum.

Plan fails to pay $50,000 on 4/15/2008 and 7/15/2008. On October 1, sponsor contributes $300,000. Plan assets decrease 30% over 2008. ERGO, sponsor elects on 4/1/2009 to apply FSCOB to cover $300,000 minimum in 2008 and add $300,000 to PFB and forego pouring $75,000 of FSCOB down the water closet.

It appears since election to apply FSCOB was made well after quarterly due dates, PBGC should have been notfied of missed quarterlies (at least once).

Question: In determining excess contributions 1/1/2008, what should be the discount rates? I.e., should 5% penalty apply? I argue "no" since funding obligation was honored effective 1/1/2008 when 4/1/2009 election was made to apply FSCOB. So, PBF 1/1/2009 is simply $300,000 x (1+EIR)^(3/12).

Comments?

SEE REVISED POST BELOW

[Blinky the 3-eyed Fish]

I don't understand how use of the FSCB helps add to the PFB. You can only add to the PFB to the degree it exceeds the minimum contribution ignoring any use of the FSCB.

Of course this is proposed regs, so are you taking a position against them?

[Andy the Actuary]

As usual, you are correct, and I was mired in a day dream. Thank you.

I restate the question.

Calendar Year Plan has 2008 quarterly contribution requirement of $50,000. 2008 contribution requirement is $250,000. Plan has FSCOB of $600,000 and employer elects on April 1, 2009 to apply $250,000 of FSCOB to reduce contribution to $0.

Plan fails to pay $50,000 on 4/15/2008 and 7/15/2008. On October 1, sponsor contributes $325,000 and so employer has $75,000 of excess contributions ignoring interest discounts.

It appears since election to apply FSCOB was made well after quarterly due dates, PBGC should have been notfied of missed quarterlies (at least once).

Question: In determining excess contributions 1/1/2008, what should be the discount rates? I.e., should 5% penalty apply? I argue "no" since funding obligation was honored effective 1/1/2008 when 4/1/2009 election was made to apply FSCOB. So, assuming employer makes election to add to PFB, PBF 1/1/2009 is simply $75,000 x (1+EIR)^(3/12) ignoring interest discounts.

Comments?

[Blinky the 3-eyed Fish]

I know the proposed regs state that an election to use a credit balance to satisfy a quarterly contribution must be made by the quarterly due date. Being that election is not in place, what is your argument to not apply the 5% penalty?

I find this election timing to be a bit ridiculous though and would consider ignoring it. Although I haven't yet.

[Andy the Actuary]

I know the proposed regs state that an election to use a credit balance to satisfy a quarterly contribution must be made by the quarterly due date. Being that election is not in place, what is your argument to not apply the 5% penalty?

I find this election timing to be a bit ridiculous though and would consider ignoring it. Although I haven't yet.

Argument is that FSCOB is applied at beginning of the year so that in practice there really wasn't a quarterly obligation since the minimum contribution had been satsified. When the election was made on 4/1/2009 to apply the FSCOB, there was no discounting to the FSCOB because the election was made on 4/1/2009 rather than 1/1/2008.

I can think of no other code area that has been of more work and less value than the quarterly contribution requirement as it pertains to small plans. Lot of times to "do things right" (whatever that means), you're breaking a contribution into two pieces and applying a penalty to part. E.g., quarterly contribution of $10,000 due 7/15/2008; employer makes contribution of $10,250 on 8/1/2008. $10,000 of it is discounted with the interest penalty to 7/15/2008 and then without the interest penalty to 1/1/2008. $250 is discounted to 1/1/2008 without interest penalty. The bottom line result is a few dollars and an operational headache. I truly believe if I were younger, I'd do something more intellectually rewarding like become a telemarketer.

[Mike Preston]

Plan fails to pay $50,000 on 4/15/2008 and 7/15/2008. On October 1, sponsor contributes $225,000, so employer has contributed $325,000 in total and has $75,000 of excess contributions ignoring interest discounts.

I don't see where the $325k comes from. Can you elaborate?

[Andy the Actuary]

Plan fails to pay $50,000 on 4/15/2008 and 7/15/2008. On October 1, sponsor contributes $225,000, so employer has contributed $325,000 in total and has $75,000 of excess contributions ignoring interest discounts.

I don't see where the $325k comes from. Can you elaborate?

Yes, you take 50 not made + 50 not made add 225 and then change 225 to 325 to correct bad example. I surprised you were unable to determine that I was having a bad mental ([x] day [x] month [x] year?). Thank's for reading carefully and calling to my attention. Example has been corrected.

[Mike Preston]

Until further notice, I am taking the same position you are taking with respect to an election made to apply a balance (COB or PFB) to the MRC. That is, it doesn't matter when the election is made, the effect is the same as if the election were to have been made on the first day of the plan year in question for 430 purposes.

It seems perfectly reasonable in a tit-for-tat kind of way. If the IRS thinks nothing of requiring a Plan Sponsor to make elections to apply balances to MRC in order to satisfy quarterly contribution requirements that might not be known as of the date the election theoretically needs to be made, we should be able to delay said election and get the same mileage we would have gotten.

I agree with you that a plan with more participants than the PBGC threshold (25) would have triggered at least a one-time filing.

[Andy the Actuary]

I agree with you that a plan with more participants than the PBGC threshold (25) would have triggered at least a one-time filing.

Now, here is something interesting if my math and memory are correct.

2008 FT = $2 million

2008 Assets = $3 million

2008 FSCOB = 1.5 million (not burnt)

2008 TNC= 500,000

2008 Shortfall = 2 - (3 - 1.5) = 500,000 but no amortization required since assets greater than FT (FTAP>100%), so

2008 minimum = 500,000 = TNC

Since 2008 shortfall, quarterly contributions required in 2009

Plan frozen 12/31/2008

2009 FT = $1.8 million (not determined until 6/17/2009)

2009 TNC=0 (No hard admin fees expected to be paid by the plan)

2009 Assets = $2.1 million.

2009 required contribution = $0 (known on 6/17/2009)

quarterly contribution of $125,000 (given we don't yet know that 2009 contribution is $0) due 4/15/2009 is intentionally not made pending the 2009 actuarial valuation. So, this well-funded plan must notify PBGC by 5/15/2009.

It will be interesting to see how the PBGC reacts to the myriad of nuisance notices. We should note that the small-plan relief afforded by PBGC Technical Release 09-3 applies for 2009 plan years only.