Shorfall Exemption vs. Negative Amortization

[dmb]

I realize that logic and PPA is a contradiction in terms, but please let me know if i'm correct in following example regarding shortfall amortization charge:

1/1/09 valuation:

FT= 100,000

AVA= 110,000

COB= 15,000

PFB= 0

PV of Prior Charge= 20,000

2008 Amortization Charge= 5,000

Since AVA-PFB > FT, there is no amortization base set up for 2009 year, but since the AVA-PFB-COB < FT, the 5,000 charge does not get wiped out and is again charged for 2009.

But consider that if the 2009 shortfall calculation is followed through we get FT-AVA+PFB+COB= 5,000 shortfall. Since this amount is less than the 20,000 PV of prior charges would otherwise create a shortfall credit for 2009.

So instead of being able to utilize a shortfall credit for 2009 that would have resulted in a lesser cost, because the AVA-PFB > FT, there is no charge (or credit) for 2009 which results in a higher cost than what would have been created if the shortfall calculation could be carried through.

Is my calculation and assumption correct and if so is there logic behind it?? Thanks.

[Andy the Actuary]

Oh, good grief!!! Your logic seems right.

In the particular example, you could make all of this go away by burning $5,000 of COB, which would then wipe out your prior base. The best part of doing this is you would eliminate quarterlies for 2010!!!

[dmb]

Oh, good grief!!! Your logic seems right.

In the particular example, you could make all of this go away by burning $5,000 of COB, which would then wipe out your prior base. The best part of doing this is you would eliminate quarterlies for 2010!!!

I agree that burning CB would be best in this instance, but this is a made up example.

[Blinky the 3-eyed Fish]

For a 1/1/09 val, you only consider 94% of the FT. $100,000 * 94% = $94,000. $110,000 less $15,000 is $95,000 so your 2008 base is wiped away.

But let's say it's 2010 and you consider 96%, then no new base is established but your prior year base remains. It's a nonsensical result, but it's the way the regs read, for now.

[Effen]

For a 1/1/09 val, you only consider 94% of the FT. $100,000 * 94% = $94,000. $110,000 less $15,000 is $95,000 so your 2008 base is wiped away.

I didn't think that was the way it worked. I thought you only consider the transition percentages when determining if a new base is created and how much that base should be. You don't wipe our prior bases until the actual shortfall (ignoring transitions) is zero.

430©(6) EARLY DEEMED AMORTIZATION UPON ATTAINMENT OF FUNDING TARGET. --In any case in which the funding shortfall of a plan for a plan year is zero, for purposes of determining the shortfall amortization charge for such plan year and succeeding plan years, the shortfall amortization bases for all preceding plan years (and all shortfall amortization installments determined with respect to such bases) shall be reduced to zero.

[dmb]

For a 1/1/09 val, you only consider 94% of the FT. $100,000 * 94% = $94,000. $110,000 less $15,000 is $95,000 so your 2008 base is wiped away.

I didn't think that was the way it worked. I thought you only consider the transition percentages when determining if a new base is created and how much that base should be. You don't wipe our prior bases until the actual shortfall (ignoring transitions) is zero.

430©(6) EARLY DEEMED AMORTIZATION UPON ATTAINMENT OF FUNDING TARGET. --In any case in which the funding shortfall of a plan for a plan year is zero, for purposes of determining the shortfall amortization charge for such plan year and succeeding plan years, the shortfall amortization bases for all preceding plan years (and all shortfall amortization installments determined with respect to such bases) shall be reduced to zero.

Sorry for the confusion regarding the 94% issue, i was only trying to confirm that it was possible to screwed out of a negative base by being exempt from setting up a current year base.

[Blinky the 3-eyed Fish]

For a 1/1/09 val, you only consider 94% of the FT. $100,000 * 94% = $94,000. $110,000 less $15,000 is $95,000 so your 2008 base is wiped away.

I didn't think that was the way it worked. I thought you only consider the transition percentages when determining if a new base is created and how much that base should be. You don't wipe our prior bases until the actual shortfall (ignoring transitions) is zero.

430©(6) EARLY DEEMED AMORTIZATION UPON ATTAINMENT OF FUNDING TARGET. --In any case in which the funding shortfall of a plan for a plan year is zero, for purposes of determining the shortfall amortization charge for such plan year and succeeding plan years, the shortfall amortization bases for all preceding plan years (and all shortfall amortization installments determined with respect to such bases) shall be reduced to zero.

I stand corrected. Funny thing is I went back on my notes and I knew this once. Then I forgot. I am not old enough to be senile just yet.

[Effen]

I think it should be known as "PPA induced senility" or "penility" for short

[AndyH]

Effen _____