Deemed Burn of Balances When There is a Deemed Reduction of the AFTAP

[Pension RC]

I am unsure how much of the PFB to burn in the following scenario:

2011 FT: $163,759

2011 AVA: $162,793

2011 COB: $0

2011 PFB: $26,762

2011 AFTAP: (162793 - 26762)/163759 = 83.06%

2012 AFTAP not certified by 4/1/2012, so AFTAP drops to 73.06%. I think that there are two ways to calculate the deemed burn:

Method 1: Assume that the 2011 FT increases to $186,190 so that the AFTAP equals (163793 - 26762)/186190 = 73.06%. Then I should burn $12,922 of the PFB so that the new PFB is $13,840 and the new AFTAP is (163793 - 13840)/186190 = 80%.

Method 2: Assume that the 2011 AVA decreases to $146,405 so that the AFTAP equals (146405 - 26762)/163759 = 73.06%. Then I should burn $11,370 of the PFB so that the new PFB is $15,392 and the new AFTAP is (146405 - 15392)/163759 = 80%.

Are either of these approaches correct?

Any help would be greatly appreciated!

[Andy the Actuary]

My recollection is that the mandatory credit balance forfeitures when there is presumed underfunding is covered by the final (2009) r430 regs. Search for "presumed AFTAP."

[david rigby]

How do you know there is a deemed burn?

[Andy the Actuary]

There may not be if you can't get to 80%. But, if not, you have big problems if restriction notices were not sent out.

[david rigby]

As far as I can tell, the facts in the OP do not require a burn.

[Pension RC]

Thanks for your replies.

My valuation software is indicating that there is a deemed burn at 4/1. David - why shouldn't there be a deemed burn?

It is only a husband-wife plan, so I didn't think restriction notices were necessary. Is this correct?

Thanks again.

[Hojo]

Method 1 is the correct approach.

[david rigby]

A deemed burn is associated with a 436 restriction. No restriction has been identified.

[Pension RC]

Doesn't the drop to 73.06% at 4/1 trigger a lump sum restriction?

[david rigby]

Doesn't the drop to 73.06% at 4/1 trigger a lump sum restriction?

Yes, but nothing in the post indicated that such restriction applied.

[My 2 cents]

The following points are based on my understanding of this process:

1. Agreed, if there are no options under the plan subject to restriction, there would be no need for a credit balance burn. If there are, it wouldn't matter if nobody is currently eligible for such a benefit.

2. If there is not enough credit balance to get to the next level, no burn is needed.

3. I think that the procedure spelled out above is not quite right - you have to calculate a deemed funding target based on 2013 assets, not 2012 assets or the 2012 funding target. Consider the following excerpt from the preamble to the final regulations:

"The final regulations use the presumed AFTAP and the interim value of adjusted plan assets as of a date to calculate a presumed adjusted funding target as of that date. The presumed adjusted funding target is then compared to the interim value of adjusted plan assets in order to determine the amount of any deemed reduction in the funding standard carryover balance and prefunding balance under section 436(f)(3) that is made as of the first day of the plan year (and, in certain circumstances, that may be made later in the plan year).

The interim value of adjusted plan assets is equal to the value of adjusted plan assets as of the first day of the plan year, determined without regard to future contributions and future elections with respect to the plan’s prefunding and funding standard carryover balances under section 430(f) (for example, elections to add to the prefunding balance for the prior plan year, elections to use the prefunding and funding standard carryover balances to offset the minimum required contribution for a year, and elections (including deemed elections under section 436(f)(3)) to reduce the prefunding

and funding standard carryover balances for the current plan year). The presumed adjusted funding target is equal to the interim value of adjusted plan assets for the plan year divided by the presumed AFTAP.

The final regulations provide that, if the presumed AFTAP for the plan year changes during the year, the rules regarding the deemed election to reduce funding balances must be reapplied based on the new presumed AFTAP. This will typically occur on the first day of the 4th month of a plan year, but could also happen at a different date if the enrolled actuary certifies the AFTAP for the prior plan year during the current plan year. In order to determine the amount of any reduction in prefunding balance and funding standard carryover balance that would apply in such a situation, a

new presumed adjusted funding target must be established, which is then compared to the updated interim value of adjusted plan assets. For this purpose, the updated interim value of adjusted plan assets for the plan year is determined as the interim value of adjusted plan assets as of the first day of the plan year updated to take into account contributions for the prior plan year and section 430(f) elections with respect to the plan’s prefunding and funding standard carryover balances made before the date of the change in the presumed AFTAP, and the new presumed adjusted funding target is equal to the updated interim value of adjusted plan assets divided by the new presumed AFTAP. The reapplication of the rules regarding the deemed election under section 436(f)(3) may require an additional reduction in funding balances if the amount of the reduction in funding balances that is necessary to reach the applicable threshold to avoid the application of the limitation under section 436(d) or (e) is greater than the amount that was initially reduced. Prior reductions of funding balances continue to apply."

[D Syrett]

Similar fact pattern / different question:

I have a deemed burn at 4/1/2014 due to a 78% presumptive 2014 AFTAP.

Are my balances for my 1/1/2014 val before the burn? (I would assume so.)