Negative PV of S/F Installments

[Guest raintrain19]

I have an EOY plan with the following information:

· AVA = 1,848,635

· CoB = 51,672

· PB = 153,808

· Adj Assets = 1,643,155

· FT = 1,699,835

Prior S/F amounts:

Date Initial Amt Installment PV

12/31/2008 234,405 39,399 112,101

12/31/2009 -97,069 -16,252 -60,066

12/31/2010 -77,269 -12,535 -56,432

Total 10,612 -4,397

Any opinions on how to handle the above scenario.

[My 2 cents]

Since I don't work with end of year valuations, I am going to answer as though your numbers are all beginning of year.

Easiest solution is to cut the Gordian Knot and waive the Carryover Balance and enough of the Prefunding Balance (assuming you still can) to get the assets up above the Funding Target. Then all of the Shortfall Amounts disappear.

I was just grappling with something like this, at least on a theoretical basis, and this is how I think it works: Again, interpreting everything as though on a first day of the plan year basis, you show a Funding Shortfall of $56,680 and a present value of remaining amortization amounts for prior shortfall bases of minus $4,397. Continue the prior shortfall amortizations and establish a new shortfall base for the current year of $61,077 (Funding Shortfall minus PV of future amortization payments for prior shortfall bases), with an annual amortization amount around $10,000. This would bring this year's net shortfall amortization payment to something around $20,000.

[Andy the Actuary]

We need some info. Given you still have a COB, the PFB has not been used. Consequently, in considering whether to establish a new base in 2010, you would consider only the AVA/FT ratio without reducing AVA. Dido, 2009. My understanding is you were exempt from establishing a new base if AVA >= FT. And this included establishing a negative base. If my understanding is off-base, please advise.

[My 2 cents]

I agree that if one does not use any prefunding balance, then no new base would be established, since the assets would exceed the funding target unless one had to offset the assets by the prefunding balance. If it were all carryover balance, you would not need to establish a new base given these values. If the assets were the amount shown as adjusted assets and there were no bases, my comment would stand (except for there being no amounts to waive).

[Guest raintrain19]

I agree that the plan is exempt from creating a new s/f amort base for 2012, as it was for 2011, however the prior bases do not go away since there is still a funding shortfall in the plan. There have been funding shortfalls in all years, 2008-2011.

I also agree that the client could waive enough of the CoB and PB to make the S/F bases disappear.

However, assuming that does not happen, my question is more regarding completion of the SB, as the numbers are what they are right now. Using the above numbers, line 32 a and b are -4,397 and 10,612 respectively. Wait, what?? That makes no sense to me.

[Andy the Actuary]

What did the 2010 SB report???? Your issue is not just occurring now!!

[Guest raintrain19]

What did the 2010 SB report???? Your issue is not just occurring now!!

For what it's worth, this is a takeover plan.

The 2010 SB's outstanding balance was about $19k and installment was 10,612, so no issues there.

2011 SB had an o/s balance around $5k, so it looks like the installment was limited to $5k, although the attachment was clearly overridden to make the annual charge equal to $5k, and not the $10,612.

[Andy the Actuary]

What did the 2010 SB report???? Your issue is not just occurring now!!

For what it's worth, this is a takeover plan.

The 2010 SB's outstanding balance was about $19k and installment was 10,612, so no issues there.

2011 SB had an o/s balance around $5k, so it looks like the installment was limited to $5k, although the attachment was clearly overridden to make the annual charge equal to $5k, and not the $10,612.

Is amending 2011 5500 a viable option?

[Guest raintrain19]

Just so that we're on the same page, my question revolves around the 2012 SB/5500. I don't think going back to 2011 and amending is a viable option. Amending for 2012 could possibly work, but at this point in the game I think we're past that. To me, the two options are either:

• have a negative o/s balance on the SB and a positive installment
• deem that all the balances are 0 and move forward.

The math says go with bullet point 1. Logic says go with bullet point 2. I don't even know if any of these are correct. I can't imagine that I'm the only person who has ever run into a situation like this and I'm surprised it's never been addressed (or at least not that I can find).

[Andy the Actuary]

I vote for (2). Reporting negative numbers on the SB when not permitted sounds like a non-option.

[david rigby]

I vote for (2). Reporting negative numbers on the SB when not permitted sounds like a non-option.

Ditto.

[My 2 cents]

Unfortunately, it seems to be the case that one can only deem the amortization bases to be $0 when there is no Funding Shortfall (with both the carryover and prefunding balances subtracted from the assets). That, together with the fact that the PPA version of the Full Funding Limitation does not allow you to limit the shortfall amortization payment to the Funding Shortfall can lead to illogical results, I do note that the instructions to the Schedule SB do say that the shortfall amortization payment (sum of prior amounts and amortization of new base, if any) should not be less than $0, so if the net amortization payment would otherwise be negative, you would apparently continue to report that there are bases, give their outstanding balance, but show a $0 amortization amount. If there is a funding shortfall but the plan is exempt from establishing a new base and the present value of the remaining payments for the prior bases is negative, I guess you report the negative number as the outstanding balance and the greater of $0 or the net sum of the ongoing amortization amounts as the amortization amount. So for the plan mentioned in the original post, show an outstanding balance of -$4,397 and an amortization amount of $10,000+.

[Andy the Actuary]

While my 2 cents interptetation of the instructions might be accurate, I would excercise spirit-of-the-law judgment and not report negative numbers. Instructions or not, you're looking for trouble.

[My 2 cents]

If you don't want to show a negative balance, show an outstanding balance of $0, but in any event, the $10,000 must be charged (and an amortization schedule should be attached to the SB). I don't think that it is permissible under the law or regulations to deem all balances to be $0 and eliminate the existing shortfall amortization bases and shortfall amortization amounts until the adjusted assets equal or exceed the Funding Target and there is no Funding Shortfall. If the $10,000 charge were not applied and the plan were audited, there could be all kinds of issues, since it appears that the IRS's understanding of the spirit of the law is to keep recognizing each amortization amount for 7 years without change unless there comes a time when there is no Funding Shortfall (based on adjusted assets). Conversely, if there is a positive PV but a negative net sum of the amortizations, show the PV as the outstanding balance and a $0 charge (with an amortization schedule attached, perhaps with an added sentence saying that since the net shortfall amortization payment would otherwise be negative, the charge applied is $0).

[Andy the Actuary]

Sensible approach offered by my 2-center. Negative numbers may kick out an error-report.

[ubermax]

I go along with "My 2 Cents" ---- he/she has got it !!

[Calavera]

I vote for $0 of Outsatnding Balance, and $10,612 of Installment. The instruction for Line 32(a) says: "...enter the sum (but not less than zero) of the outstanding balances of all shortfall amortization bases..."

[My 2 cents]

I vote for $0 of Outsatnding Balance, and $10,612 of Installment. The instruction for Line 32(a) says: "...enter the sum (but not less than zero) of the outstanding balances of all shortfall amortization bases..."

Gotta agree with Calavera, but please note that the "but not less than zero" is new for the 2012 instructions. My easiest access to the instructions is for 2011 and earlier (which did say that the amortization amount should not be less than $0 but did not address the present value being negative) so I was not aware of the change. So show a $0 outstanding balance but do not neglect to include the positive amortization required for the plan.

[Hojo]

Wait wait wait....I'm going back to original question on this.....

How can the total outstanding balance be negative? Doesn't the total outstanding balance have to add up to the unfunded????

I can see a positive total outstanding balance and a negative amortization, but again, how is the total outstading balance negative.

[My 2 cents]

It would be equal to the shortfall if you were to set up a new base this year equal to the shortfall minus the PV of the old bases, but it was noted above that the plan is exempt from establishing a new base (and exempt = a new base is not permitted to be set up). The PV of future amortizations for this year's bases may, in fact, be negative since no new base will true it up.

[Guest raintrain19]

Yes, the math works out exactly the way 'My 2 Cents' described above. I agree that it is very odd, and in a perfect world would be addressed at some point, but bc of the infrequency at which this occurs, that's highly unlikely. One can dream, can't they...