Freeze of benefit accruals - timing

[Dinosaur]

I am preparing a 1/1/2010 valuation. You accrue a benefit if you work at least 1000 hours in a plan year. If we freeze the benefit accruals as of April 30, 2010 (adopting the amendment some time this month) there would be no benefit accrual in 2010. So when running the 1/1/2010 valuation I would think that there would be no Target Normal Cost for 2010. Does this seem right or would the Target Normal Cost be prorated by 4/12?

[Effen]

Depends on a couple of different things (assuming it is a small plan that only requires 15 days notice).

1) Did they earn any benefit from 1/1/ to 4/12? If so, than I think they would have a TNC.

2) Did they adopt a 412(d)(2) election? If so, they are electing to have the amendment treated like was in effect on the first day of the year and therefore no TNC.

I don't think "prorating" would be proper. It is either based on the actual accrual earned, or if no accrual and a 412(d)(2) election then it would be zero.

Also, don't forget that the TNC also needs to reflect anticipated administrative expenses, so just because there isn't any accrual, doesn't necessary mean the TNC is zero.

[Andy the Actuary]

From final IRS regs under 430/436, "Under the final regulations, the target normal cost of a plan for the plan year is the present value (determined as of the valuation date) of all benefits under the plan that accrue during, are earned during, or are otherwise allocated to service for the plan year, . . . For an amendment that decreases benefits, the amendment takes effect under a plan on the first date on which the benefits of any individual who is or could be a participant or beneficiary under the plan would be decreased due to the amendment if the individual were on that date to satisfy the applicable conditions for the benefits. . . conditions for the benefits. The regulations provide that section 412(d)(2) applies for purposes of determining whether a plan amendment is treated as having been adopted on the first day of the plan year (including a plan amendment adopted no later than 21⁄2 months after the close of the plan year). the rule in section 2.02 of Revenue Ruling 77–2 (1977–1 CB 120) under which the charges for a plan year are based on a blend of the charges determined with and without regard to the plan amendment, and the alternative to that rule in section 3 of Revenue Ruling 77–2, no longer apply."

It appears all of this says in your situation, there will be no TNC (pro-ration does not apply) except as the other Andy indicated possibly for expenses.

[Effen]

Not disagreeing with ATA, but I think a 412(d)(2) election is required. Under the previous law this election only applied to amendments made after the end of the plan year, however PPA made it required for any amendment made after the valuation date.

1.430(d)-1(d)(1)(ii) Plan provisions adopted after valuation date. --If a plan administrator makes the election described in section 412(d)(2) with respect to a plan amendment, then the plan amendment is treated as having been adopted on the first day of the plan year for purposes of this paragraph (d). Section 412(d)(2) applies to any plan amendment adopted no later than 2-1/2 months after the close of the plan year, including an amendment adopted during the plan year. Thus, if an amendment is adopted after the valuation date for a plan year (and no later than 2-1/2 months after the close of the plan year), but takes effect by the last day of the plan year, the amendment is taken into account in determining the plan's funding target and target normal cost for the plan year if the plan administrator makes the election described in section 412(d)(2) with respect to such amendment.

One question would be is checking the box on the Sch. R sufficient to satisify the requirement even though the instructions state it is required for amendments adopted after the end of the plan year? Do you think you would need a PPA type election like those used to add/burn/use PFB/COBs?

[Andy the Actuary]

Mr. E's point is well-taken. I would opt for the Schedule R approach though this item appears to be more information-like than election-like. The real question is why would plan sponsor ever disagree? Plan is frozen to reduce costs. If plan sponsor wants to contribute more, then it is certainly likely he can do so with the ample 404 cushion.

From 2009 5500 Schedule R instructions: See Temporary Regulations section 11.412©-7(b) for details on when and how to make the election and the information to include on the statement of election, which must be filed with the Form 5500 annual return/report.

Here's the ancient reg, which by the way applies to amendments made after the close of the plan year.

§ 11.412©–7 Election to treat certain retroactive plan amendments as made on the first day of the plan year.

(a) General rule. Under section

412©(8), a plan administrator may elect to have any amendment which is adopted after the close of the plan year to which it applies deemed to have been made on the first day of such plan year if the amendment— (1) Is adopted no later than 2 and onehalf months after the close of such plan year (or, in the case of a multiemployer plan, no later than 2 years after the close of such plan year), (2) Does not reduce the accrued benefit of any participant determined as of the beginning of such plan year, and (3) Does not reduce the accrued benefit of any participant determined as of the time of adoption of the amendment, or, if it does so reduce such accrued benefit, it is shown that the plan administrator filed a notice with the Secretary of Labor notifying him of the amendment, and— (i) The Secretary of Labor approved the amendment, or (ii) The Secretary of Labor failed to disapprove the amendment within 90 days after the date on which the notice was filed.

(b) Time and manner of making election.

(1) The election under section

412©(8) shall be made by the plan administrator by a statement of election described in subparagraph (3) of this paragraph, attached to the annual return relating to minimum funding standards required to be filed under section 6058 with respect to the plan year to which the election relates.

(2) In the event that an amendment to which paragraph (a) of this section applies is adopted after the filing of the annual return required under section

6058, the plan administrator may make the election under section 412©(8) by attaching a statement of election, described in paragraph (b)(3) of this section, to a copy of such annual return, and filing such copy no later than the time allowed for the filing of such returns under section 6058. (In the case of multiemployer plans, such copy may be filed within a 24 month period beginning with the date prescribed for the filing of such returns.)

(3) The statement of election filed by or on behalf of the plan administrator shall— (i) State the date of the close of the first plan year to which the amendment applies and the date on which the amendment was adopted; (ii) Contain a statement that the amendment does not reduce the accrued benefit of any participant determined as of the beginning of the plan year preceding the plan year in which the amendment is adopted; and (iii) Contain either— (A) A statement that the amendment does not reduce the accrued benefit of any participant determined as of the time of adoption of such amendment, or (B) A copy of the notice filed with the Secretary of Labor under section

412©(8) and a statement that either the Secretary of Labor has approved the amendment or he has failed to act within 90 days after notification of the amendment.

[T.D. 7338, 39 FR 44751, Dec. 27, 1974]

[Dougsbpc]

Seems right that OP would not have a TNC.

If a 412(d)(2) election were made, would there be any shortfall amortization payment to consider (assuming there was one)?