COB to satisfy quarterly contributions

[Dinosaur]

The valuation date was changed from 12/31/2008 to 1/1/2008. The Schedule C income for 2008 was very low compared to prior years so I need to use some of the carryover balance (COB) to offset minimum required contribution (and apply towards late quarterly contributions due to high COB)

Does the plan sponsor have until the filing of the 2008 Schedule SB to make this election? I believe I have until the filing of the Schedule SB to use some of the COB to offset the Minimum Required Contribution but didn't know if it was different due to the late quarterly contributions.

Say each quarterly contribution installment is $5,000, the EIR is 6%, the plan has over $200,000 in COB as of 1/1/2008. Would I do the following:

-first installment due 4/15/08: use $4,916 of COB as of 1/1/08 since $4,916 x 1.06^(3/5.12) = $5,000

-second installment due 7/15/08: use $4,844 of COB as of 1/1/08 since $4,844 x 1.06^(6/5.12) = $5,000

and so on?

[Guest robertwa]

I think the election to use the COB to satisfy the quarterly has to be made by the quarterly due date; otherwise the quarterly is considered late. The proposed regulations issued 4/15/2008 say

"...(ii) Satisfaction of installments through use of funding balances. In the case of a plan that is subject to the quarterly contribution requirement under this paragraph ©, if the plan sponsor makes an election to use the plan’s prefunding balance or funding standard carryover balance under section 430(f), then the plan sponsor is treated as satisfying the obligation to make a required installment under paragraph ©(1)(i) of this section on the date of the election to the extent of the amount elected, as adjusted with interest. This interest adjustment is made at the plan’s effective interest rate under section 430(h)(2)(A) for the plan year from the valuation date through the due date of the installment."

But who knows what the final regulations will say (where are they, anyway?!)

[Andy the Actuary]

The hidden affliction of PPA -- Abled bodied men reduced to tears because they are failing at administering an overly complicated law that you can't keep straight or communicate.

[Dinosaur]

I think the election to use the COB to satisfy the quarterly has to be made by the quarterly due date; otherwise the quarterly is considered late. The proposed regulations issued 4/15/2008 say

"...(ii) Satisfaction of installments through use of funding balances. In the case of a plan that is subject to the quarterly contribution requirement under this paragraph ©, if the plan sponsor makes an election to use the plan’s prefunding balance or funding standard carryover balance under section 430(f), then the plan sponsor is treated as satisfying the obligation to make a required installment under paragraph ©(1)(i) of this section on the date of the election to the extent of the amount elected, as adjusted with interest. This interest adjustment is made at the plan’s effective interest rate under section 430(h)(2)(A) for the plan year from the valuation date through the due date of the installment."

But who knows what the final regulations will say (where are they, anyway?!)

So, any ideas on what to do? What did people do in this situation? The 2008 contribution has to be made by 9/15

Would it make sense to use some amount of the COB so that increasing the COB by the EIR from 1/1/2008 to 4/15/2008 and by (EOR +5%) from 4/15/2008 to 9/15/2009 so that it would increase to $5,000 (amount of the installment)

[Andy the Actuary]

Here's a compromise. Calculate the minimum required contribution as your discounted quarterly contributions including interest penalties. Then, elect to use an amount of COB to offset.

Technically, you could employ the COB to reduce your contribution but then the quarterlies are still due unless you want to take the position that you've eliminated the quarterly contribution obligation by making the contribution up front (via applying the COB).

Neither one of these alternatives is prescribed. I prefer the second argument because it essentially concludes there is no quarterly contribution obligation. The first says there is an excuse me but we will cover it in another fashion. On the other hand, the first argument could be viewed as a conservative approach and therefore is preferable.

Hopefully, final regs will provide an answer and if so, I'd bet it will be the second.

[Mike Preston]

I'm not so sure that the proposed regs don't prescribe. In fact, I'm pretty sure there is no such thing as a separate election to use the COB to satisfy quarterlies. Instead, there is an election to use a part of the COB toward the required minimum. Once that election is made, the amount put toward the required minimum is treated as satisfying the quarterlies, to the extent the interest adjusted amount as of the quarterly due dates satisfies those quarterlies.

The application of the interest penalty is a separate issue and merely serves to increase the required minimum, but doesn't, in and of itself, impact the amount of the quarterlies.

In the case posited, the amount of the $200,000 COB that is needed to satisfy the 4 quarterlies is:

-first installment due 4/15/08: use $4,916 of COB as of 1/1/08 since $4,916 x 1.06^(3.5/12) = $5,000

-second installment due 7/15/08: use $4,845 of COB as of 1/1/08 since $4,845 x 1.06^(6.5/12) = $5,000

-third installment due 10/15/08: use $4,775 of COB as of 1/1/08 since $4,775 x 1.06^(9.5/12) = $5,000

-fourth installment due 1/15/09: use $4,706 of COB as of 1/1/08 since $4,706 x 1.06^(12.5/12) = $5,000

Total COB that must be elected to be used towards the required minimum to satisfy quarterlies is: 4916+4845+4775+4706=19242

Now, it goes without saying that the required minimum is at least $20,000 (otherwise the quarterlies wouldn't be $5,000), so the required minimum is never satisfied by the amount that just barely satisfies the quarterly contribution requirement.

Assume that the required minimum as of the val date of 1/1 is $25,000, before any uptick required by not satisfying the quarterly contributions timely. In the absence of an interest uptick the additional amount of the COB that must be elected towards the minimum required contribution would merely be $25,000 - $19,242 = $5,758.

But that can't be the right amount if any of the quarterlies were late, since that calculation ($5,758) doesn't provide for an interest uptick of any kind.

At issue is how to determine the interest uptick. In the case of an EOY valuation, the law and proposed regs really make very little sense (some silliness about the interest uptick not applying to the extent the late amounts are satisfied before the valuation date - just nonsensical).

I think the eventual rule will be that the interest uptick is calculated identically for an EOY val and a BOY val and the interest uptick will be based on the date of the election, just like it would be based on the date of a contribution.

So, assuming that this client waits until 9/15/2009 to make the election to use all that is necessary of the COB to satisfy the complete required minimum contribution, we would find that the uptick is determined as follows:

1st quarterly is 17 months late, therefore leading to an uptick of [1.05 ^ (17/12) * $5,000] -$5,000 = $358

2nd quarterly is 14 months late, therefore leading to an uptick of [1.05 ^ (14/12) * $5,000] -$5,000 = $293

3rd quarterly is 11 months late, therefore leading to an uptick of [1.05 ^ (11/12) * $5,000] -$5,000 = $229

4th quarterly is 8 months late, therefore leading to an uptick of [1.05 ^ (8/12) * $5,000] -$5,000 = $165

So, we know that there is an interest adjustment of $1,045 to make.

Clearly an election to use $26,045 of the COB will satisfy the required minimum for the year.

What is not known is whether the $1,045 is to be used as of the valuation date or whether the "uptick" is deemed to occur (in fits and spurts) partially on 4/15, partially on 7/15, partially on 10/15 and partially on 1/15/x+1. If that were the case, then the uptick would be discounted to the valuation date at the EIR (6% in this case). I'm not going to calculate those amounts because I don't think it is reasonable to interpret the regulation this way (others may disagree, of course).

I think the $1,045 will be the uptick as of the valuation date and therefore $26,045 of the COB appplied to the required minimum on 9/15/2009 will just satisfy the required minimum for the year.

Note that there is a significant difference between electing to use $26,045 of the COB on 9/15/2009 towards the required minimum and contributing $26,045 on 9/15/2009.

The contribution made on 9/15/2009 would need to be discounted at the EIR to the valuation date, so the amount credited towards the required minimum would be substantially less than $26,045 as of 1/1/2008, although the interest uptick calculation would be identical to the above. This is obvious to those who have worked with quarterlies for years, but since everything is new with PPA in 2008 it is worth stating the obvious.

[Guest robertwa]

In fact, I'm pretty sure there is no such thing as a separate election to use the COB to satisfy quarterlies. Instead, there is an election to use a part of the COB toward the required minimum. Once that election is made, the amount put toward the required minimum is treated as satisfying the quarterlies, to the extent the interest adjusted amount as of the quarterly due dates satisfies those quarterlies.

The application of the interest penalty is a separate issue and merely serves to increase the required minimum, but doesn't, in and of itself, impact the amount of the quarterlies.

I agree with that. I also agree that there is an issue of how to calculate the interest "uptick" if the date of election is after the quarterly due dates.

I've been using a method that calculates the uptick as equal to the reduction in present value that a contribution would have been subject to if it had been used to satisfy the late quarterly. Using the given example: Normally a contribution of 5000 made 9/15/2009 for the 2008 plan year would be discounted to 1/1/2008 at the effective rate of 6% for 20.5 months = 5000/1.06^(20.5/12)= 4526. If that 5000 instead was used to satisfy a late 4/15/2008 quarterly, it would be discounted for 17 months at 11% and 3.5 months at 6% = 5000/1.11^(17/12)/1.06^(3.5/12)=4240. The difference in PVs is 286 and that's what I think is the extra credit balance that is used up as of 1/1/2008 due to the late 4/15/2008 quarterly.

Hopefully the final regs will reflect what the IRS indicated in the preamble to the proposed regs - that quarterlies will automatically be deemed to be satisfied by credit balances to the extent available - and we won't have to worry about all this!

"Comments are requested regarding whether rules should be provided under which a plan sponsor is deemed to make an election to use a funding balance to the extent it is available to avoid a failure to make any required quarterly installment or under which a plan sponsor can make a single election that will apply to all future quarterly installments until revoked."

[Mike Preston]

Your message has highlighted the difference in our methodologies nicely. Yours is the "more conservative" in that you are defining a higher required contribution. The net effect is that I'm giving "credit" for purposes of satisfying the quarterlies as of the quarterly due date, while you are not giving that "credit" until the date of the election to use the COB.

Nicely highlighted.

We will have to just wait and see which is the method they end up with in the final regulations.

I *think* (although I can't be sure) that my method is the one that the IRS used at the ACOPA Symposium. Maybe somebody who was there can confirm.

[AndyH]

the final regulations

Waiting for this feels like waiting for the Tooth Fairy or the Easter bunny. Any shareable insights on the ETA? Perhaps 9/15 at 11:59 PM? Or maybe the same hour on 9/30? Are they going to package it with the "Public Option" snuck in on page 2968 maybe.

[Mike Preston]

I wish I knew. All I know is that somebody was talking to somebody at Treasury earlier this week and they said "They aren't ready, yet."

[AndyH]

Thanks. And to think that Jim Holland suggested that you leave open 4 days at the early August Chicago ACOPA conference on account of these regs. And plan for lots of summer reading as well.

[Mike Preston]

To be fair to Jim, the timing of when they are released is not up to him. The review process AFTER it leaves the confines of the IRS is fraught with peril. Seemingly, once a "higher up" gets a hold of the regulation in what is perceived to be final form, they are free to raise any number of issues, such as policy issues, or consistency issues (maybe even with things that have not yet been published), and things get delayed.

It is an old story. One that has repeated itself over the years more times than I can count. It is therefore never a good idea to take anybody's statement about when regulations will be published as gospel.

[AndyH]

Understood and agreed. He is always clear about that. But this did sound imminent in June.