Increasing plan benefit formula

[Guest Deflector]

A plan has an increasing benefit formula. At the beginning of the plan year, the AB equals $10 x YOS. At the end of the plan year, the AB equals $11 x YOS. The increase occurs in the middle of the year. This formula is from an amendment that has been effective for years, pre-PPA. The plan is a BOY valuation.

Assume a participant has 20 YOS at the BOY, AB = $200, and 21 YOS at the EOY, AB = $231. Does the entire increase go towards TNC? Does the increase get pro-rated, meaning PV $11 increase for TNC? I remember seeing something regarding if you have an amendment increasing benefits during the year that you would pro-rate the TNC. However, this plan does not have an amending during the year, it is just an increase in benefits from the plan formula.

How do you determine the funding for the plan year?

[zimbo]

In the IRS proposed regs, 1.430(d)-1, it indicates that amendments adopted on or before the valuation date and effective during the plan year are considered in terms of minimum funding. Your amendment was adopted PRIOR to the val date even though the increase becomes effective AFTER the valuation date.

Based upon that, I would say that your Funding Target and Target Normal Cost would use the benefits in effect during the plan year in which the valuation date falls. So, effectively, you would use the $11 per YOS benefit formula for purposes of determining minimum funding for that year.

[Guest Deflector]

Thanks. I also found a nice example of this in the EA conference Grey Book for 2008, Question #7.

[david rigby]

For the edification of other readers, here is the Gray Book Q&A.

Gray Book 2008-7

PPA Funding: Reflecting Plan Amendments

Assume a calendar year plan with a January 1 valuation date has an amendment adopted during 2007 that takes effect on July 1, 2008. The amendment increases the plan's flat benefit from $30/month times service to $32/month times all service. Per the proposed regulations on minimum funding (issued on December 28, 2007), the amendment must be reflected in the 2008 plan year valuation. What is the proper approach to reflect the amendment in the valuation?

(a) Both the Funding Target (FT) at January 1, 2008 and the Target Normal Cost TNC for 2008 are based on $32.

(b) The FT is based on the $30 multiplier. The increase in accrued benefits from $30 to $32 should be treated as benefits accrued or earned during 2008 and reflected in the TNC. For example, for a participant with 10 years of service on January 1, 2008, the FT would be based on an annual benefit of $3,600 (i.e., $30 x 10 x 12). The TNC would reflect the increase in the annual benefit from $3,600 at the beginning of the year to $4,224 (i.e., $32 x 11 x 12) at the end of the year, or $624.

Would the answer be different if the amendment was effective on January 1, 2008? January 1, 2009?

Would the answer be different if the amendment applied only to benefit service after July 1, 2008?

Would the answer be different if the amendment were adopted during 2008, but after January 1?

RESPONSE

Under the proposed regulations, (a) is the correct approach and would also apply if the amendment was effective on any day during the 2008 plan year (and would be ignored if effective in a later plan year).

If the amendment applied only to benefit service after July 1, 2008, then the FT at January 1, 2008 should be based on $30. The TNC for the 2008 plan year should reflect six months of benefit accrual at $30 and an additional six months of benefit accrual at $32.

If the amendment were adopted in 2008, but after January 1, 2008, then it would be ignored unless a IRC §412(d)(2) election is made.

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.

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