Cash Balance, EOY Val, MQCs, SB line 19c

[carrots]

Please excuse the cryptic topic title!

Assume:

Cash Balance Plan Year 1/1/2009-12/31/2009

Valuation Date 12/31/2009

Valuation Assets $300,000

Funding Target $300,000

Target Normal Cost $80,000

Minimum Required Quarterly Installments $10,000 4/15/2009, 7/15/2009, 10/15/2009, 1/15/2010

Actual Contribution 3/15/2010 $100,000

Effective Rate 6%

2009 Schedule SB lines 19a and 19b are $0

What should be the entry on the 2009 Schedule SB line 19c?

How about 100,000 / {(1.11 ^ (2 /12)) * (1.06 ^ (.5 / 12))} = $98,037?

That seems to follow the Schedule SB instructions, but totally ignores the late MRQs from 2009!

[SoCalActuary]

My recollection is that you discount the contribution back to 1-1-2009, reflecting the interest discount (eff + 5%) on all missed quarterly amounts, then bring forward to val date at effective rate.

[carrots]

SoCal, that would appear to fall under IRC430(j)(3)(E)(iii), but I'm not finding a reg for that. The technique you describe makes sense, but do you know if there is a reg or proposed reg for this?

[Mike Preston]

The only thing you will find is the mention in the preamble to the existing final regs that tells us that the concept of applying the additional 5% penalty will apply to all late payments, not just those that take place after the valuation date.

[carrots]

Proposed reg 1.430(j)-1©(iii)(B) says that the modified interest rate (5% increase) only applies to quarterlies due on or after the valuation date.

[Mike Preston]

Your attempt to make me look up the reference has failed.

[carrots]

Your attempt to make me look up the reference has failed.

Aw, shucks!

[Mike Preston]

OK, I looked it up. If you continue to read the section you cited, you will find a reference to another section in the case of payments due before the valuation date. If you follow that reference, it will say "Reserved."

So, we know the proposed regs are silent on the issue.

Looking to the text that precedes the proposed reg itself, you will find a section entitled "Proposed Legislation". This is the fifth section from the end (the last section being "Drafting Information").

In that section dealing with "Proposed Legislation" the IRS says that the "... additional amount would be determined by applying interest at an annual rate of 5% to the underpayment of the required installment for the period of time between the due date for the required installment and the earlier of the date of payment or the valuation date."

So, when we get final regs on the issue (I note that the proposed regs were published on 4/15/2008), are you willing to ignore this warning from the IRS and risk not applying penalty interest for late quarterlies due before the valuation date in the hope that the IRS will allow the additional amount to be determined only for payments missed after the publication of the final regs?

Do you feel lucky? Well, do ya'?

[carrots]

Thanks, Mike.

I found the provision in WRERA that authorized the treasury to issue regs on interest adjustments for late quarterlies in plans with end of year valuation dates. So I agree that it is probably prudent to increase the required contribution by 5%, at an annual rate, from the due date of the quarterly to the end of the plan year (since the contribution was not paid until after the end of the year).

The other side of the coin, of course, is what happens if the regs on this, when issued, are not retroactive!

[Mike Preston]

There is no way on this earth that it will not be "allowable" to use the method identified in the proposed reg preamble. In the vast majority of cases there is a spread between the minimum and the maximum. By increasing the minimum you are reducing that spread and there is a no harm no foul result. Sure, there are situations where the spread doesn't exist, but they really are rare.