Annual Funding Notice for Terminated Plan

[AndyH]

Need to do an Annual Funding Notice for a large terminated plan that is beyond the year that it was last subject to minimum funding. Is there any guidance on what an appropriate format might be?

Facts: Termination effective 6/30/2010. Doing AFN for PYE 6/30/2011.

In the page one three year grid, is it appropriate to simply put "N/A" for all liability related items in the column for plan year beginning 7/1/2010?

And then "Plan's liabilities", under the "Fair Market Value of Assets" would be "N/A"?

Is there any informal (or formal) guidance in this situation? What have others done? This is a large plan, so it is important that this be "correct". Thanks for any help.

[Andy the Actuary]

If the Plan plays lump sums and was not frozen before the magic September 2005 date, wouldn't it still be subject to 436 so AFTAP would need to be determined and hence, liability numbers are available? Then, if AFTAP >= 80%, the plan could distribute lump sums during the limbo period before which, for example, the D-Letter has not been received.

[AndyH]

If the Plan plays lump sums and was not frozen before the magic September 2005 date, wouldn't it still be subject to 436 so AFTAP would need to be determined and hence, liability numbers are available? Then, if AFTAP >= 80%, the plan could distribute lump sums during the limbo period before which, for example, the D-Letter has not been received.

I don't think so. As I understand it, the same 436 restrictions that were in effect pre-termination remain in effect other than actions in connection with the termination of the plan such as distributions or annuity purchases solely in connection with the plan termination. I'm not sure if that is from the Code or the regs but I have read that.

Am I missing something?

[Andy the Actuary]

As I understand it, the same 436 restrictions that were in effect pre-termination remain in effect other than actions in connection with the termination of the plan such as distributions or annuity purchases solely in connection with the plan termination.

It would be great if someone can quote chapter and verse. This means, if what you state is the rule, that in your situation if the AFTAP <80% prior to plan termination, the plan sponsor could not contribute additional amounts to remove restrictions. The question would then become, "Why not?" It would also suggest that if AFTAP>80% prior to termination, that plan could be amended to increase benefits without regard to resulting post-amendment funding status and this doesn't sound kosher.

This stuff is very educational -- It teaches you how to cuss !!!

[SoCalActuary]

This stuff is very educational -- It teaches you how to cuss !!!

You must have been so bright as a kid that you skipped junior high school. That's where I learned to cuss.

[Guest Quagmire]

As I understand it, the same 436 restrictions that were in effect pre-termination remain in effect other than actions in connection with the termination of the plan such as distributions or annuity purchases solely in connection with the plan termination.

It would be great if someone can quote chapter and verse. This means, if what you state is the rule, that in your situation if the AFTAP <80% prior to plan termination, the plan sponsor could not contribute additional amounts to remove restrictions. The question would then become, "Why not?" It would also suggest that if AFTAP>80% prior to termination, that plan could be amended to increase benefits without regard to resulting post-amendment funding status and this doesn't sound kosher.

This stuff is very educational -- It teaches you how to cuss !!!

§ 1.436-1(a)(3)(ii)

(ii) Application of section 436 after termination of a plan—

If you place your cursor over a link and pause, the introductory text from the link will appear. If you then pull your cursor down into that text and click, the link will open in a new window superimposed on your old window, allowing you to read things side-by-side no matter how far apart they may be in the Code or Regulations. You can open as many of these windows as you want.

[AndyH]

Thanks Quagmire,

That is exactly on point,

§ 1.436-1(a)(3)(ii)(A)

(A) In general. Except as otherwise provided in paragraph (a)(3)(ii)(B) of this section, any section 436 limitations in effect immediately before the termination of a plan do not cease to apply thereafter.

§ 1.436-1(a)(3)(ii)(B)

(B) Exception for payments pursuant to plan termination. The limitations under section 436(d) and paragraph (d) of this section do not apply to prohibited payments (within the meaning of paragraph (j)(6) of this section) that are made to carry out the termination of a plan in accordance with applicable law. For example, a plan sponsor's purchase of an irrevocable commitment from an insurer to pay benefit liabilities in connection with the standard termination of a plan in accordance with section 4041(b)(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and in accordance with 29 CFR 4041.28, does not violate section 436(d) or this section.

[Andy the Actuary]

Thank you. I still contend the meaning may not be ambiguous. They specify "do not cease to apply" rather than "continue to apply. So, they could be interpreted to mean that you don't forgive the restrictions that apply prior to termination but it does not mean you can't remove them by making contributions.

I suspect I may be the sole earthling who sees them this way.

[JAY21]

Anything new on this topic ? I have the exact situation that AndyH posted initially, I have an Annual Funding Notice due for the plan year that follows the plan year in which the plan terminated (Due to long wait for IRS DL), so I have no required Valuation for funding purposes. Do I need to run a special "Valuation" just for an AFTAP purpose for the year following the plan term year ? so I can then also show the FTAP on the Annual Funding Notice ?