New Shortfall Amortization Base?

[My 2 cents]

This concerns a situation where a plan's FTAP is between 96% and 99.9%.

Presumably, the following three statements are all true with respect to 2010 plan years (assume that the plan was in existence before 2007 and not subject to the Deficit Reduction Contribution requirements in 2007):

1. If the plan's assets, net only of PFB, are at least as great as the Funding Target, then any existing shortfall bases are eliminated and none are started, without regard to the relationship between assets - PFB - COB and the Funding Target.

2. If the plan's assets, net only of PFB, are below 96% of the Funding Target, then you establish a new shortfall base as usual in 2010 (using assets - COB - PFB vs 96% of Funding Target, net of discounted value of remaining prior shortfall amortization amounts, which in most instances in 2010 will mean an offsetting, negative new base thanks to the generally high investment yields for 2009).

3. If the plan's assets, net only of PFB, are at least as great as 96% of the Funding Target and there were no shortfall bases last year, then, irrespective of the COB, there are no shortfall bases this year.

Question: If there was at least one shortfall amortization base last year and this year's assets, net only of PFB, are at least 96% of the Funding Target but not 100%, is there any doubt that you can establish a new, partially offsetting shortfall base this year (assuming that plan experience in 2009 was favorable)?

I have heard it said that if the plan falls between 96% and 99%, then PPA says you do not establish a new shortfall base (but one is not at liberty to eliminate prior shortfall bases). Note that under such an interpretation, one could easily encounter a situation (especially with recent ifavorable nvestment performance) where a plan that is 95% funded could easily have a lower minimum required contribution than an otherwise identical plan that is 96% funded. How could that ever legitimately be the case?

[Andy the Actuary]

How could that ever legitimately be the case?

The 430 regs were not exactly handed down to us by a supreme being. It is bewildering how many scenarios you can conjure up where the regs produce a ridiculous result.

[SoCalActuary]

This problem has been discussed with senior IRS actuaries.

Your common sense opinion is not accepted. If you have a prior base and no authority to make an offsetting negative base, that's just too bad. Pay on the prior base as part of your MRC. The IRS actuaries just don't care that this is inconsistent.

[My 2 cents]

Two comments:

1. It has been pointed out to me that the prior base(s) cannot be eliminated unless the assets - COB - PFB are bigger than the Funding Target. So please ignore the comment in the first statement about eliminating the prior bases irrespective of the COB. I stand by the use of that phrase in the 3rd statement, however.

2. Has there been any formal guidance to indicate that PPA actually prohibits the establishment of a new shortfall base when one falls into a favorable range that was supposed to generate relief? As noted, treating the transition rule/general rule as barring the plan from deriving any benefit from favorable experience iby blocking the establishment of a base in the manner that would apply if the funding was worse s irrational. Why would the IRS want to force something like that? Seems as though we are talking about an outright error in the law - should there be an effort made to seek a technical correction?