Adding to Prefunding Balance

[Dougsbpc]

Are there any disadvantages to electing to add to the prefunding balance?

[Andy the Actuary]

(1) Could result in quarterly contributions being required for years subsequent to year added.

(2) Could result in your not being able to use FSCOB for years subsequent to year added.

(3) Could create larger amortization base.

Look at this frozen plan (ignore interest)

FT=900,000

Assets= 1,000,000

FSCOB=50,000

Excess contribution = 300,000 added to PFB which now = 300,000

Then, short fall=900,000 - (1,000,000-300,00-50,000)=250,000

(1) Quarterly contributions required next year

(2) (1,000,000-300,000)/900,000=78%, so can't use FSCOB next year

If don't add to PFB

Shortfall = 900,000 - (1,000,000-50,000)=(50,000) no shortfall

(1) Quarterly contributions not required next year

(2) (1,000,000-0)/900,000=111% so can use FSCOB next year

[SoCalActuary]

My compromise would be to add to the PFB, but only a portion of the excess. To avoid quarterly, just get to 100%.

[Andy the Actuary]

SCA's suggestion is a good compromise, especially for Plans subject to PBGC notification, where you don't even want a chance your client will miss notifying the PBGC of missed quarterlies. For plans not subject to PBGC notification, quarterlies are not a problem. One way to deal with them for clients who are not concerned about paying the bare bones minimum and where there is 404 room is simply to determine the minimum required contribution [without getting upset over the nomenclature] as if it were all being paid 8 1/2 months after the close of the plan year. If paid sooner, than fine.