110% Test

[emmetttrudy]

Trying to determine if an HCE is eligible for a distribution as of 11/1/2011. We have the FT. TNC and FT of the individual participant as of the most recent valuation date, 1/1/2011. Is the correct methodology to take the 1/1 numbers and increase them for 10 months at the plans effective interest rate to come up with an estimated 11/1/2011 liability? And is the total liability you compare to the assets the FT + TNC, or just the FT?

Once I increase the plan's FT, TNC, and participant's FT with the EIR, then:

Contribution Required to Pass Test = 110%(FT + TNC - Participant's FT) - Assets + (PVAB of Participant)

[Effen]

As far as I know there is no defined methodology, in fact the regs still reference "current liability" which no longer exists. I think the critical thing is that the plan is (or is expected to be) at least 110% funded after the distribution.

The safest thing would be to estimate the EOY FT and EOY assets, both after the payout, and make sure the projected assets are 110% of the projected FT, but I don't think that is the only valid test. It would probably be safest if the ER committed to making sure the plan was actually 110% at the EOY, but I don't think that is required either. In other words, if your current "reasonable, good faith" projection shows the plan will be 110% funded after the payout, but when the EOY actually comes it is only 105% funded, I don't think that is necessarily a problem, however if the ER makes a contribution to bring it up to 110%, then it would obviously be fine.

I assume it is a typo, but shouldn't the last term of your equation be "Assets - (PVAB of Participant)", not +.

[Andy the Actuary]

Agree with Effen -- no prescribed IRS methodology. Just (1) see what the plan says and (2) apply whatever method used uniformly and consistently.

[david rigby]

Agree.

I think there is a Gray Book Q&A on this issue. As best I can recall, it opines that FT or CL is a valid basis for the test.