PPA Funding

[Gary]

A plan has a plan year that ends 7/31/09.

As of 8/1/08 the AB was 20k after 15 years of service.

As of 7/31/09 the AB is 40k.

The reason for the large increase in AB is due to a large increase in compensation.

So what happens is that the plan has no shortfall amortization, but a monumental target normal cost that is much more than plan sponsor wants to contribute.

If the beg. yr AB could be significantly increased to say 38k then the normal cost would be low and the funding would virtually all be a part of the shortfall amortiation thus reducing costs.

However, the 415 limit is only 22k at beg yr. so a large increase is not possible.

Of course this could be resolved if the AB at beg of yr and 415 limit at beg of yr. were able to b e based on the end of year avg comp but service at beg yr.

While the above probably isn't an option are there other creative ideas?

Thanks.

[Andy the Actuary]

It doesn't seem you can make accrued benefits 8/1/2008 and 7/31/2009 be anything other than what they are after application of 415 to the formula benefit.

[Gary]

Of course if formula at beg of yr were either frozen or amended where the increase by the end of the year is small it would provide the desired results for this one participant plan.

We're dealing with a 1 participant plan where if the plan were to be terminated you can pay out benefits to the extent funded and thus the plan (a non PBGC plan) does not really have to be fully funded.

Yet when the plan is in force the minimum funding is strict.

Bottom line is that if the plan sponsor comes in at beg of yr we can freeze benefit at beg yr. Since he came in at end of yr for tax planning we can increase benefits retroactively as of beg of yr (412d2) but can't reduce benefit below the end of yr AB.

This situation must be happening to many practitioners and plan sponsors.

What are practitioners doing? A sponsor just says they can't afford to make payment. A plan freeze effective immediately helps for the subsequent year but not for the year that just ended.

Of course the sponsor can pay a funding deficiency tax and pay the contribution when feasible, but not many sponsors are accepting of that.

Ideas?

Thanks.

[Andy the Actuary]

(1) Adopt new segment rates or yield curve for 2009

(2) Adopt asset smoothing for 2009

(3) Possibly changing retirement age assumption, if justified, will change segment weighting and through you more into 3rd segment.

(4) If PY ends 7/31/2009, then sponsor will have until April 15, 2010 to make contributions.

(5) You may be able to amend plan for loan to help manage contribution cashflow.

[Gary]

Well it's the 2008 valuation and the plan assets did not drop as we do a 8/1/08 valuation.

Segment rate adjustments can help some I suppose.

Yes they can take plan loans. That's true.

Thanks.

[david rigby]

Well it's the 2008 valuation and the plan assets did not drop as we do a 8/1/08 valuation.

Is using a 7/31/09 (EOY) valdate possible? (Don't know if it would help, just asking?)

[carrots]

If the valuation date is 8/1/2008, the TNC is based upon the expected increase in AB during 8/1/2008-7/31/2009 plan year. What did you expect, as of 8/1/2008? Did you, for example, expect that the salary would not increase or, perhaps, that the participant would not work enough hours to accrue an increase in AB? Could the TNC, based upon an expected $0 increase in AB, be $0?

[Gary]

I could use a 7/31/09 val date but it wont help as I can see.

[Gary]

Let's focus on carrots point of view for a moment.

Yes, it is an 8/1/08 valuation, but we have actual compensation as of 7/31/09 and typically use it. That is where the problem lies. It increased substantially thus causing a large increase in benefit during the year and a large cost.

If I use an estimated increae in compensation (ignoring what actually occurred) of say 5% then of course the costs would be manageable.

That's a thought, but not sure if a reasonable method.

I'll think about it and entertain other views.

Thanks.

[carrots]

It would be a change in funding method, but I think that is okay since it is the first year for PPA06.

[Gary]

The change would help for 2008 but then of course the large cost would arrive in 2009 and then the plan sponsor will be real surpirsed and difficult, so not sure if I want to take that route.

It may be better to have them deal with it now whne it corresponds to th is high year of compensation. In their case they do not have financial problems.

I'll think about it some.

Thanks.

[carrots]

The proposed reg on approval for changes in funding method is 1.430(d)-1(g)(3)

[Gary]

Thanks carrots.

So changing the method of using plan year compensation falls into a change in funding method? I'll try and validate that in some way, but it makes sense.

That is, it is not one of the basic method changes such as unit credit to entry age normal, etc.

[carrots]

Gary, also the large increase in AB will fall into the FT, rather than the TNC, so that it can be amortized over 7 years. You may need to watch the AFTAP.

[Gary]

Excellent points.

My only remaining question is how do you determine the compensation issue to be a funding method change as opposed to an assumtion change?

Is it just that using an actual pay versus an assumed pay is a method change in how valuation compensation is defiined as opposed to an assumption change?

Another actuary views it as an assumption change.

Do you know anything concrete that supports this as a method change or is it more of an interpretation you have?

Thanks.

[carrots]

The way I view it is that you have a method for determining the salary (current year) and, if you change that method (to prior years salary and a salary increase factor), you are now using a new method.

But, I can understand someone saying that you are are just changing the salary assumption!

[Gary]

Thank you.