Short Plan Year Charges

[Andy the Actuary]

Under the proposed regs, the amortization charge is prorated for the short plan year but the TNC isn't. This leads to (2) questions:

(1) How would you handle the expense portion of the TNC? We could prorate some or all of the expense. For example, suppose a SPY of 8/1/2010-12/31/2010. Let's say the expense assumption is that the current year's expense is assumed to be the same as the prior year's expense. However, let's suppose that during the SPY that no PBGC premium would be paid by the Plan. I.e., such premium would have normally been paid 1/1/2011-7/31/2011. Would make sense to exclude this from the expense before proration?

(2) How is the amortization factor determined -- over calendar years or Plan Years? Let's say there are no existing bases but a base is created 8/1/2010. Let's also say for the sake of illustration ease that all segment rates are equal. Would the amortization factor be determined as an annuity over seven years, or would it be 5/12 +v^(5/12)x annuity (6 years)? Thus, come 1/1/2011 we would determine the remaining unamortized base from either an annuity (6 7/12 years) or annuity (6 years). In either case, it would seem if there are existing bases and charges 8/1/2010 that they would need to be adjusted in some fashion for the change in Plan Year.

[Guest RRO]

I'd like to reopen this topic as I now have to deal with a short plan year with prior shortfall bases and a new base for the short plan year. I know that the shortfall payments must be prorated, but my question deals with how to determine the present value of the remaining payments.

I have looked at the proposed regs - 1.430(a)-1(b)(2)(ii) and at examples 7 & 8 in 1.430(a)-1(g).

I have also looked at 1.430(h)(2)-1(f)(2), but would like to hear some opinions on what the correct present value method should be.

Assume a short plan year 7/1/11 to 12/31/11. The first 2 funding segment rates for the 7/1/11 val are 3% and 5%.

A base was established on 7/1/09 with a shortfall payment = $5,000.

The payment on this base for the 7/1/11 plan year is $2,500.

How should the present value of the remaining payments be calculated?

Option 1:

7/1/11 - 2500 * 1/1.03^0 = 2500

1/1/12 - 5000 * 1/1.03^1 = 4854

1/1/13 - 5000 * 1/1.03^2 = 4713

1/1/14 - 5000 * 1/1.03^3 = 4576

1/1/15 - 5000 * 1/1.03^4 = 4442

1/1/16 - 2500 * 1/1.05^5 = 1959

Total - 23,044

Option 2:

Same as Option 1 except 1/1/16 present value determined using a factor of 1/1.03^5 * 2500 = 2157 - total = 23,242

Option 3:

7/1/11 - 2500 * 1/1.03^0 = 2500

1/1/12 - 5000 * 1/1.03^.5 = 4927

1/1/13 - 5000 * 1/1.03^1.5 = 4783

1/1/14 - 5000 * 1/1.03^2.5 = 4644

1/1/15 - 5000 * 1/1.03^3.5 = 4509

1/1/16 - 2500 * 1/1.05^4.5 = 2007

Total - 23,370

Option 4:

Same as Option 3 except 1/1/16 present value determined using a factor of 1/1.03^4.5 * 2500 = 2189 - total = 23,552

Many thanks to all who reply. I wish they had given better examples in the regs!

[Guest Hark75]

Under the proposed regs, the amortization charge is prorated for the short plan year but the TNC isn't. This leads to (2) questions:

(1) How would you handle the expense portion of the TNC? We could prorate some or all of the expense. For example, suppose a SPY of 8/1/2010-12/31/2010. Let's say the expense assumption is that the current year's expense is assumed to be the same as the prior year's expense. However, let's suppose that during the SPY that no PBGC premium would be paid by the Plan. I.e., such premium would have normally been paid 1/1/2011-7/31/2011. Would make sense to exclude this from the expense before proration?

(2) How is the amortization factor determined -- over calendar years or Plan Years? Let's say there are no existing bases but a base is created 8/1/2010. Let's also say for the sake of illustration ease that all segment rates are equal. Would the amortization factor be determined as an annuity over seven years, or would it be 5/12 +v^(5/12)x annuity (6 years)? Thus, come 1/1/2011 we would determine the remaining unamortized base from either an annuity (6 7/12 years) or annuity (6 years). In either case, it would seem if there are existing bases and charges 8/1/2010 that they would need to be adjusted in some fashion for the change in Plan Year.

QUESTION for Andy: I want to change the plan year in a DB plan from year ending in October to calendar year. The formula is Years of service (up to 30) times 1.85% of FAPay (with a permitted disparity component also). If I prorate service in the short plan year, then participants working at least 167 hours in short plan year get an extra year of service, which seems like a windfall. How do I make this change without providing the windfall?

[SoCalActuary]

You could change the accrual to elapsed time in months, and change the average compensation to calendar year.

[Guest Hark75]

You could change the accrual to elapsed time in months, and change the average compensation to calendar year.

Thanks for the suggestion.