Material change in AFTAP?

[My 2 cents]

Calendar year plan, valuation date on January 1. The 2009 AFTAP was originally certified as 78% in September 2009 (2008 AFTAP had been above 90%, so deemed rate above 80%). Consideration is being given to revising the January 1, 2009 valuation now to use the October 2008 full yield curve (would eliminate need for any further 2009 contributions). Smallish plan with no benefit commencements since before the September 2009 AFTAP certification. The only benefit form possibly subject to Section 436 is a full cash refund form. The revised valuation for 2009 would change the 2009 AFTAP to just over 90%. A range certification for 2010 was issued at the end of March 2010 indicating that the 2010 AFTAP would be between 80% and 100%. Presume that suitable notices were distributed in 2009 after the September AFTAP certification (indicating that restrictions could apply to the full cash refund form) and after the March 2010 range certification (indicating that the restrictions no longer applied). The 2009 Schedule SB has not been prepared yet.

Is there any bar now to the sponsor electing to use the October 2008 full yield curve for the January 1, 2009 valuation? They would be doing so expecting to elect to go back to the normal three-tier segment rates as of January 1, 2010. No restrictions are believed to apply with respect to IRS consent, for either election.

[Blinky the 3-eyed Fish]

My opinion is you have a problem making this change. Plan operations are affected by the switch to the yield curve so you have yourself a material change.

[My 2 cents]

Is there a materiality issue even if there were no actual benefit determinations during the period in which the plan was considered to have been under the partial restricitions? Nobody unable to take their benefit in the form desired? The only problem (besides the mere fact of the latest certified AFTAP) was that from September 2009 through late in March 2010, the participants may have been on notice that restrictions could come into play (and even then, it is questionable that partial limitations would interfere with the election of the entire benefit payable as a full cash refund annuity, which is paid from the fund, not purchased). Prior to September, they were working under the 2008 AFTAP minus 10% (which was above 80%) and in late March 2010, there was a range certification for 2010 putting them above 80%. Presume that everyone in this smallish plan was properly notified within 30 days of the September 2009 certification and also within 30 days of the March 2010 range certification. Nothing much happened between the two dates.

There is a second larger plan which never fell below 80% and which also received a March 2010 range certification. Would there be any possible issues if the 2009 valuation for that plan were now revised to the October 2008 full yield curve, irrespective of any administrative activity?

[Effen]

I agree with Blinky - according to the regs, it is a material change no matter what your facts are.

That said, the client still may choose to do it. If I was the client, I'm not sure I would let a material change stop me from keeping my company running. Saving significant amounts of contribution might be worth the risk.

However, if the company goes into bankruptcy, expect the PBGC to ask to see all of the elections and notices that have been sent.

[My 2 cents]

Granted that the regulations appear to treat the change in the AFTAP as material (at least for the plan that went below 80% and then back above it, for the same period), if the plan administration for the period between the initial AFTAP certification (putting them below 80%) and the subsequent AFTAP certification (putting them back above 80%, retroactively) would have been correct and appropriate and in accordance with plan provisions whether the plan had fallen below 80% or not (because no benefit determinations occurred or because there were no distribution options that would have had to be restricted), would the materiality of the change pose any threat to the plan's qualification status?

If the conversion factor to go from a straight life annuity to a full cash refund form is 20% (i.e., a straight life annuity of $1,000 per month could be converted to a full cash refund form of $800 per month), would any restrictions apply with respect to such an election while a plan is between 60% and 80% funded? Presume that all participants receiving benefits under a full cash refund form are cooperative enough not to die while the plan is subject to restriction, whether benefits had commenced during the restricted period or prior. The regulations appear to be clear enough that any restrictions in effect when the participant dies would apply with respect to carrying out the death benefit payout feature of the form without regard to what the plan's status was when the participant's payments had begun.

[Blinky the 3-eyed Fish]

I presumed that you mentioned the cash refund option in the OP becuase it could somehow cause a prohibited payment to occur. Are you saying that's not the case unless the participant dies? If so, one could still argue that nobody took a cash refund payment becuase they knew if they died, the prohibited payment couldn't occur due to the restrictions, and that is how it could affect plan operations.

The reality of the situation though is that is a terribly weak argument to say there is a material change IMO under this fact pattern. Also, you are talking about 2009 and the final regs are effective 2010. Going on a reasonable interpretation of the code, you have a bolstered argument to redo the val.

[My 2 cents]

I mentioned the full cash refund option because that is the only payment option that could possibly be subject to limitation under the plan. And it is not merely that nobody took a full cash refund form (possibly because they were concerned that their beneficiary might have trouble collecting) but nobody took any form of benefit at all during the period between the 2009 original AFTAP certification that put them into the 50% limitation range and the 2010 range certification that terminated any possible restrictions on distributions. It's a smallish plan with minimal activity.

The other plan covered more people and there could have been some activity but that plan was never measured as having fallen below 80%. A revision from something above 80% to something else above 80% is less likely to be treated as material (especially if a range certification was issued prior to the date that the deemed percentage would have become applicable and sufficient quarterly contributions for 2010 have certainly been paid).

Do you agree that just because there was a material change in the certified AFTAP does not necessarily create qualification problems?

[Blinky the 3-eyed Fish]

I mentioned the full cash refund option because that is the only payment option that could possibly be subject to limitation under the plan. And it is not merely that nobody took a full cash refund form (possibly because they were concerned that their beneficiary might have trouble collecting) but nobody took any form of benefit at all during the period between the 2009 original AFTAP certification that put them into the 50% limitation range and the 2010 range certification that terminated any possible restrictions on distributions. It's a smallish plan with minimal activity.

The criteria are not that nobody took the full cash refund form, it's that nobody was eligible for a distribution at all during the restricted period. After all, someone could have not taken that form or a distribution at all because it was less appealing because of the restrictions. Those are the criteria.

The other plan covered more people and there could have been some activity but that plan was never measured as having fallen below 80%. A revision from something above 80% to something else above 80% is less likely to be treated as material (especially if a range certification was issued prior to the date that the deemed percentage would have become applicable and sufficient quarterly contributions for 2010 have certainly been paid).

This is not a material change because the plan was above 80% at all times.

Do you agree that just because there was a material change in the certified AFTAP does not necessarily create qualification problems?

I do not agree. A material change is a qualification issue.

[My 2 cents]

Is a full cash refund form actually restricted when a plan is between 60% and 80% funded? The present value of the death benefit is well under 50% of the value of the overall benefit, and the payments to be made during the participant's lifetime involve no acceleration whatsoever. So if the only form that is available under the plan that involves any possible acceleration is a full cash refund form (and nobody who had elected such a form dies), would a change in the certified AFTAP from 75% to 83% be material?