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Rick Groszkiewicz, FSA, EA, MSPA, COPA 2964 Nestle Creek Drive Marietta, Georgia 30062 rickg@softwarepolish.com

Minimum Funding - Single Employer DB Plans. Pension Protection Act of 2006. aka ... The Actuaries Full Employment Act. Rick Groszkiewicz, FSA, EA, MSPA, COPA 2964 Nestle Creek Drive Marietta, Georgia 30062 rickg@softwarepolish.com. Software. Polish. Glossary of Abbreviations.

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Rick Groszkiewicz, FSA, EA, MSPA, COPA 2964 Nestle Creek Drive Marietta, Georgia 30062 rickg@softwarepolish.com

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  1. Minimum Funding - Single Employer DB Plans Pension Protection Act of 2006 aka ... The Actuaries Full Employment Act Rick Groszkiewicz, FSA, EA, MSPA, COPA 2964 Nestle Creek Drive Marietta, Georgia 30062 rickg@softwarepolish.com Software Polish

  2. Glossary of Abbreviations • AAV Actuarial Asset Value • CB Carryover Balance • FT Funding Target • MFSA Minimum Funding Standards Account • MRC Minimum Required Contribution • NC Normal Cost • PB Prefunding Balance • PV Present value • PY Prior Year • S/F Shortfall

  3. NOTICE 2008-21TRANSITION GUIDANCE • Only have Proposed regulations so far • IRS will not challenge reasonable interpretation of PPA during 2008 • Assume this still holds for 2009

  4. FUNDING STANDARDCARRYOVER BALANCE IRC §430(f) CB = “OLD” CREDIT BALANCE • At start of 2008 plan year, equals MFSA credit balance at end of 2007 plan year • After 2008, bring forward using prior year’s rate of return on plan assets

  5. ACTUAL RATE OF RETURN 1.430(f)-1(b)(3) Actual rate of return for prior plan year • Based on market value • Reflects timing of all contributions, benefit payments (and other) during year • Still don’t know calculation details

  6. CARRYOVER BALANCE IRC §430(f) • Employer can ELECTto maintain CB • Employer can ELECT to • Reduce CB at any time (not below zero) • Apply CB towards minimum required contribution (reduces CB) • Does not reduce minimum required contribution – reduces contribution that must be paid

  7. PREFUNDING BALANCE IRC §430(f) PB = “NEW” CREDIT BALANCE • At start of 2008 plan year, value = zero • After 2008, bring forward using prior year’s rate of return on plan assets

  8. PREFUNDING BALANCE IRC §430(f) • Employer can ELECT to increase PB by excess of Total contribution over Minimum required contribution • Employer can ELECT to reduce PB (similar to CB elections) • Prior to employer election to reduce PB, must first reduce CB to zero

  9. PREFUNDING BALANCE IRC §430(f) Employer can ELECT to • Reduce PB at any time (not below zero) • Apply PB toward minimum required contribution (reduces PB) • Does not reduce minimum required contribution – reduces contribution that must be paid

  10. ELECTIONS / TIMING / EFFECT 1.430(f)-1(b)(1) • Minimum contribution is defined as of the valuation date • Elections to increase (or decrease) PB (and CB) are deemed to affect value of PB (and CB) as of first day of plan year

  11. ELECTIONS / TIMING / EFFECT 1.430(f)-1(f)(2) • Elections must be made in writing • Elections are irrevocable • Election to increase PB by excess contributions • Must be made by due date of Form 5500 • Applicable plan year corresponds to the year for which the excess contributions were made • Election to decrease PB (or CB) • Must be made by end of plan year for which the election is made

  12. MINIMUM REQUIRED CONTRIBUTION (MRC) IRC §430(a) GENERAL RULE • MRC = Target Normal Cost + Shortfall amortization charge + Waiver amortization charge • MRC must be ≥ Zero

  13. MINIMUM REQUIRED CONTRIBUTION (MRC) IRC §430(a) FUNDING SURPLUS • If (AAV–CB–PB) > Funding Target then MRC = NC – [(AAV–CB–PB) – Funding Target] • MRC must be ≥ Zero

  14. MINIMUM REQUIRED CONTRIBUTION IRC §430(a)

  15. TARGET NORMAL COST IRC §430(b) WRERA changed definition: • PV of benefits earned during year • Plus plan related expenses expected to be paid from assets during year • Minus mandatory EEC during year

  16. ACTUARIAL VALUEOF ASSETS IRC §430(g)(3) • Default value = Fair market value • Can use average of fair market values

  17. ACTUARIAL VALUEOF ASSETS IRC §430(g)(3) • Can use average of fair market values • Latest value: MVA at valuation date • Earliest value: MVA on last day of 25th month prior to month of valuation date • 90% MVA ≤ final AAV ≤ 110% MVA • Averaging must be adjusted for contributions, distributions, expected earnings • Can not use assumed earnings rate greater than 3rd segment rate

  18. ACTUARIAL VALUEOF ASSETS IRC §430(g)(3) • Adjustment for prior plan year contributions • Allow for payments after valuation date • Include present value in asset value • Present value calculated using effective interest rate from prior year valuation

  19. ACTUARIAL VALUEOF ASSETS IRC §430(g)(3) • Adjustment for current plan year contributions • Only necessary if valuation date other than first day of plan year • Allow for payments prior to valuation date • Exclude accumulated value from asset value • Accumulated value calculated using effective interest rate for current year valuation

  20. OFFSET MINIMUM BY PB (OR CB) IRC §430(f)(3) • Not all plans can apply PB (or CB) toward MRC • Can NOT make election if Funding Ratio < 80% {AAV – PB}Funding Target (not At-Risk) • Funding ratio uses prior year valuation results

  21. INTEREST ADJUSTMENT ON Prefunding Balance 1.430(f)-1(b)(1) • Bring forward PB from prior year - use actual rate of return on plan assets • Bring forward Excess contributions from prior year - use prior year effective interest rate

  22. INTEREST ADJUSTMENT ON Prefunding Balance 1.430(f)-1(b)(1) Excess contributions = A - B • PV of prior year contributions • As of prior valuation date, and • Using prior year effective interest rate • Over MRC at prior valuation date • Exclude contributions required to avoid IRC 436 funding-based benefit limitations

  23. ACTUAL RATE OF RETURN 1.430(f)-1(b)(4) • Special rule - adjustments for investment experience - if the valuation date is NOT the first day of plan year • Adjust PB (and CB) to first day of prior plan year using prior year effective rate of interest • Bring PB (and CB) forward to next year with actual rate of return • Adjust PB (and CB) from first day of plan year to valuation date using current year effective rate of interest

  24. SHORTFALL AMORTIZATION BASE IRC §430(c)(3) • Funding Shortfall Funding Target – (AAV – CB – PB) • “O/S Bases” • PV of outstanding shortfall amortization installments for prior plan years + • Waiver amortization installments: prior plan years • Shortfall Amortization Base (Applicable percentage)*(Funding Shortfall) minus “O/S Bases”

  25. SHORTFALL AMORTIZATION BASE IRC §430(c)(5) • Applicable Percentage applies to calculate Shortfall Base (WRERA) • Applicable Percentage < 100% for “Certain Plans” • Plan must have existed during 2007 • Plan must not be subject to 412(l) for 2007

  26. SHORTFALL AMORTIZATION BASE IRC §430(c)(5) “Certain plans” must use Applicable Percentage less than 100%:

  27. SHORTFALL AMORTIZATION CHARGE IRC §430(c)(3) • Equals the sum of the Shortfall (S/F) Amortization installments for the current year and the six preceding plan years • Key point – As yield curve changes, Shortfall amortization installments are NOT recalculated

  28. SHORTFALL AMORTIZATION IRC §430(c) • Shortfall Amortization Installment: • Amount needed to amortize Shortfall Amortization base in level annual installments over 7 plan years • Amortization payment based on first two segment rates

  29. SHORTFALL AMORTIZATION IRC §430(c) • Limits on S/F amortization • Any single Shortfall Amortization installmentcan be < 0 • Shortfall amortization charge (Sum of ALL Shortfall Amortization installments) can not be < 0

  30. ELIMINATION OF SHORTFALL AMORTIZATIONS IRC §430(c)(6) • Funding Shortfall definition: Funding Target – (AAV – CB – PB)0 • If Funding Shortfall = zero, then eliminate All existing S/F amortization bases, and All existing S/F amortization installments • If Funding Shortfall = zero, then reduce NCFinal Normal Cost = Target Normal Cost + Funding Target – (AAV – CB – PB)

  31. SHORTFALL AMORTIZATION BASE EXEMPTION IRC §430(c)(5) • If modified assets >modified funding target,new S/F amortization base = Zero • Modified Assets • AAV – PB (When PB is applied toward MRC) • Otherwise use unadjusted assetsAAV – 0 • Modified Funding Target • (Applicable percentage) x (Funding Target)

  32. SUMMARY • New Definitions and Vocabulary • Carryover and Prefunding Balances • Minimum required contribution • Use of credit balances • Shortfall Amortization Base • Shortfall Amortization Charge • Shortfall Amortization Base - Exemption • Shortfall Amortization Base - Elimination

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