Funding Balance Elections

[JBones]

What is the consequence of not having a balance election timely in place for a plan for the 2008 calendar year? Is this a qualification issue or would it cause any balance that would have existed to either be erased or not established, or in the case of a plan that intended to use a credit to meet minimum funding, would the plan be considered as not meeting its MRC?

Is there any correction available?

I don't suppose that maintaining these elections beginning with the 2009 year would be considered a good-faith interpretation of the proposed regs?

[Effen]

Are you saying that you (or the actuary) signed an SB based on certain elections that weren't documented?

It might help if you provided a specific example.

I think you probably have a lot of good faith room for 2008 & 2009, but I don't think you can just ignore the requirement. If you filed the 2008 SB assuming they were going to elect to use their COB, but you didn't actually get the election, you should probably ask the client to send you their file copy which I am sure would be properly signed and dated. If one isn't available, you probably need to amend the SB.

If you are talking about adding something to the prefunding, or reducing the prefunding/cob, then I think you just operate as though they didn't elect to do it, unless they want to give you their file copy again.

I doubt there will ever be any correction procedures available, other than sanctions against the actuary. If the client didn't make the election, the actuary shouldn't be preparing SB's as though they did. I beleive in order for an election to exist, it must be documented. If it isn't documented, it never happened and the SB needs to be prepared accordingly.

[JBones]

A Few Examples:

Example 1: A client had an existing carryover balance, there was never a balance election prepared, client used a portion of the carryover balance to offset minimum contribution for the year and Schedule SB was prepared reflecting the offset - did plan actually meet minimum funding?

Example 2: A client made a contribution in excess of the minimum contribution, there was never a balance election prepared, Schedule SB lists the excess amount on line 38 (which instructions say is maximum amount PFB can be increased, rather than amount PFB is elected to be increased) - is the prefunding balance now zero, or is there a prefunding balance, but a qualification issue based on missing election?

Example 3: A client had an existing carryover balance, there was never a balance election prepared, client made a deposit in the exact amount of the minimum contribution - is the carryover balance wiped out by not preparing the election?

[Effen]

Example 1: If there was no election prepared, how could the client have "used a portion" of the COB to offset the MRC? They couldn't have used it, if they didn't elect to use it. How did you know that was what they wanted to do? If they told you verbally, I would ask them to document their decision at this point. However, the actuary should not have signed the SB without a written election.

Example 2: Just because they made excess contributions doesn't mean they created a PFB. If they don't elect to add the excess to the PFB, then you have no PFB.

Example 3: I don't think I understand your question. You keep saying "balance election", but you need to be more specific. There are many elections that impact the COB or PFB. When you say "minimum contribution", do you mean the required contribution assuming they were going to use the COB to offset? (TNC + Shortfall amort - COB?) If so, and you don't have an election to use the COB, you probably need to re-file the SB showing a deficiency (or whatever they call it now). However, it may be a better idea to ask them to confirm the decision they previously made in writing at this time. The old days of one simple straight forward “minimum” are gone. The “minimum” changes based on the employer elections.

I don't see much forgiveness on these elections. If anything it is the one thing I can see the IRS coming back and examining. Maybe not the content of the elections, but simply do they exist. I think it was pretty clear that they were necessary and to just say you didn't do them for 2008 would leave you fairly exposed. I think “good faith” means you at least gave some effort to comply.

[JBones]

Thanks, that helps. I may be taking over a handful of plans that I know the actuary did not request or receive written balance elections on and am trying to get an idea of what to do about the missing written elections.

[Effen]

If you are taking them over, and it isn't your signiture on the SB, I don't think you have any obligation to make sure the prior actuary got all the proper elections.

Just my opinion from a reasonableness point of view. Holland used to say that once you signed a Sch B you owned the credit balance, I guess the same logic could be true here, but 10 years from now I don't think you would be worried about all their past elections.

Do your best to document as much as possible. If they didn't elect to create a PFB, don't use one. If the prior actuary told you they used their COB, assume he has the election - if it isn't your signiture, I don't think you need to see it.

[Andy the Actuary]

What is a takeover actuary's responsibility to ensure that the beginning credit balances are reasonable?