Prefunding Balance - Timing of Creation and Use

[dmdavala]

A calendar year plan has $0 Credit Balance and $0 Prefunding Balance.
Quarterly contributions are required.
The sponsor has standing elections to increase the Prefunding Balance and use it to meet quarterlies and minimum requirements.

The sponsor has been timely contributing the quarterly requirements when due.

It is now September 18, 2017.  The actuary has confirmed that all of the required contributions for the 2016 plan year have been timely made.  The April and July quarterlies for the 2017 plan year have also been timely made.

The actuary decides that if the April and July 2017 quarterlies are deemed 2016 contributions, then a Prefunding Balance will be automatically created.

This Prefunding Balance can then be used to meet the April and July quarterlies. (Assume the excess contributions create sufficient Prefunding Balance to do so.)

My question is, is this allowed?

When was the Prefunding Balance created?

If used to meet the April or July quarterly, didn't it have to exist when the quarterly is due?

[SoCalActuary]

The decision to make the April and July payments as part of 2016 is the employer's decision, and it appears to provide some benefit here.  Does the employer intend to deduct in 2016 return?

 

[dmdavala]

Deductibility is not the issue. 

If the April and July payments are classified as 2016 contributions, has the sponsor missed the April and July quarterly requirements?

The Carryover balance that was created by the extra contributions was not created until September when the final contribution for 2016 was deposited.

Since the Carryover was not created until September, are the April and July quarterlies late?

[SoCalActuary]

OK, I did not see that the 2016 final contribution was made in September 2017 in your original post.  I rarely see the combination where the 2017 designated contribution is made before the 2016 final contribution.

[My 2 cents]

In my experience, it is common for the first two quarterly payments for this year to be made before the final contribution for last year.

My take on this would be that until the full 2016 contribution has been paid, no prefunding balance would arise, even under a standing election.

Example: Minimum 2016 contribution is $250,000, and quarterly contributions for 2016 of $40,000 each (the 2015 minimum having been $160,000) were timely paid, leaving something near $100,000 still to be paid.  $62,500 was paid in April and July 2017 for the 2017 quarterly amounts, but now everyone decides to count them for the 2016 year (why are we doing that, again?).   The April payment, when recharacterized to be for 2016, leaves some $35,000 of the 2016 requirement unpaid (so nothing is added yet to the prefunding balance).  The July payment, when recharacterized to be for 2016, finishes the 2016 requirements with some $27,000 left over.  That $27,000 then goes into the prefunding balance (assume it had been $0 going into 2016) and can be applied, three months late, towards the quarterly that had been due in April.  When they pay $100,000 in September for 2016, it all goes into the prefunding balance, covering the rest of the April quarterly (5 months late) and all of the July quarterly (two months late).  Did you remember to notify the PBGC on a timely basis that the first two quarterlies were not paid on time?

Bottom line:  It doesn't work out too well!

By the way, I did not use a calculator for the example, so the numbers may be off a bit.  The dynamics, however, should be on target.

[Lou S.]

Bob, a large contribution by your employer in 2017 to take the tax deduction under last year's tax law with the probable anticipation of making a smaller contribution in 2018 and using the prefunding balance due to the December tax law change might explain the jump in the prefundng balance.