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2009 pension funding regulations


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2009 Pension Funding Regulations

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2009 pension funding regulations

  1. 1. The New Pension Funding Regulations: They’re Not All They Appear to Be November 4, 2009 Jim Van Iwaarden Consulting Actuary Van Iwaarden Associates Minneapolis, Minnesota
  2. 2. Jim Van Iwaarden Consulting Actuary Van Iwaarden Associates Minneapolis, Minnesota Mr. Van Iwaarden is a consulting actuary known for innovative retirement plan design, and a frequent speaker on retirement issues. He has over 30 years’ experience in employee benefit consulting, with his own firm since 1991 and national firms before that. Mr. Van Iwaarden is a Fellow of the Society of Actuaries, an Enrolled Actuary, a Fellow of the Conference of Consulting Actuaries, and former ‘ERISA Jeopardy’ champion. He holds a BS in math, with highest honors, from the University of California.
  3. 3. Topics  PPA refresher: funding and benefit restrictions  Differences between proposed and final regs  Surprising provisions  Funding strategies  Credit balance management
  4. 4. Poll #1 I am: A. A plan sponsor, serving my employer’s plans B. A practitioner, serving many plans C. A casual observer
  5. 5. PPA Refresher: The New Language Old Name New Name Differences Credit Balance Carryover Balance (COB), Prefunding Balance (PFB) (still call them “credit balances” together) Many! Use, generation, roll forward, waivers Current Liability (CL) Funding Target Based on 3-segment smoothed or full “spot rate” yield curve Funded CL Percentage Funding Target Attainment Percentage (FTAP), Adjusted (AFTAP) Credit balances usually deducted from assets Unfunded CL Shortfall Based on funding target
  6. 6. PPA Refresher: New Minimum Contribution  Minimum required contribution (MRC) is: target normal cost PLUS shortfall amortization (7 years) MINUS credit balance (sometimes)
  7. 7. PPA Refresher: Funding Goals  Most phased in 2008 – 2011  Consequences for not reaching goals  Some WRERA relief
  8. 8. PPA Refresher: Funding Goals AFTAP Consequences of Underfunding WRERA Relief 60% in 2008 “Hard” benefit restrictions: No benefit accruals No lump sums No shutdown benefits Can “smooth” (rather than average) assets over two years Small cashouts (under $5000) exempt from restrictions Use max (2008, 2009) AFTAP for freeze threshold 65% in 2008 to 80% in 2011 At-Risk status for plans with >500 participants: Higher funding target Nonqualified funding restrictions for top 5 No relief
  9. 9. PPA Refresher: Funding Goals (continued) Goal / Consequences of Phase-In Underfunding WRERA Relief 80% Can’t use credit balance to reduce next year’s contributions “Soft” benefit restrictions: No benefit increase amendments Lump sums limited to smaller of: PBGC guaranteed benefit, and 50% of accrued benefit Asset smoothing Small cashouts exempt 92% in 2008 to 100% in 2011 No phase-in if 2007 old-law “deficit reduction contribution” No phase-in if shortfall amortization charge Amortization based on phase-in, not 100% 100% Quarterly contributions next year No relief
  10. 10. PPA Refresher: Valuation Deadlines  Until the actuary certifies the AFTAP, it’s assumed to be: – the same as last year, for the 1st 3 months – 10 percentage points lower, after that – under 60% (at-risk, “hard” benefit restrictions) if not certified after 9 months  Can issue a temporary “range” certification
  11. 11. Differences: Final Regs vs. Proposed  Automatic approval to change asset method and yield curve until 2010  “Range” AFTAP certification extends deadline to EOY for final AFTAP cert
  12. 12. Differences: Final Regs vs. Proposed  “Standing” election to apply credit balances toward minimum contributions, and/or to generate prefunding balances  Can revoke unneeded election to apply credit balance, by EOY
  13. 13. Differences: Final Regs vs. Proposed  New definition of collectively bargained plan:  25% of all participants are union, or  50% of benefiting actives are union  The second part is new  Delayed §436 effective date for coll barg plans  Benefit restrictions won’t apply until 2010
  14. 14. Poll #2 I believe plan amendments adopted after the valuation date can be recognized: A. Always B. Most of the time C. Only in cases of substantial business hardship D. Never
  15. 15. Surprising Provisions  Can you recognize plan amendments adopted after valuation date?  In proposed regs, the answer appeared to be only for substantial business hardship  In final regs, it’s clearer  But you must broaden your reading of the Internal Revenue Code
  16. 16. Surprising Provisions (cont’d)  Can you recognize plan amendments adopted after valuation date?  Yes, with §412(d)(2) election  But for §412(d)(2) you must:  ignore the part about amendments after EOY, and  ignore the part about reducing accrued benefits, and  check the box on form 5500, schedule R
  17. 17. Surprising Provisions (cont’d)  Confiscated credit balances  Presumed AFTAP at BOY = same as last year  Suppose last year’s AFTAP is just under 80%: “deemed election” waives some of balance if there’s enough to avoid benefit restrictions  Deemed election is irrevocable, even if actual AFTAP comes up over 80% without waiving  IRS ignored comments on similar provisions in proposed regs
  18. 18. Funding Strategies  Want to avoid hassles & restrictions  <60%: hard restrictions, at-risk for larger plans  <80%: soft benefit restrictions  <100%: quarterly contributions, shortfall amort  Cherry-pick interest rates & asset method for 2008 and 2009  PPA maximum deductions are HUGE  Contribute to avoid restrictions, when feasible  Manage credit balances to avoid hassles
  19. 19. Credit Balance Management  When to keep COB’s & PFB’s  When to get rid of them  When to not even generate them
  20. 20. Credit Balance Mgmt (cont’d)  Watch out! Several versions of FTAP:  For AFTAP cert, deduct PFB & COB if assets<FT  For quarterly trigger: always deduct PFB & COB  For shortfall exemption & CB use: deduct only PFB  Can have quarterlies even if LY AFTAP>100%  COB’s are slightly better than PFB’s
  21. 21. Credit Balance Mgmt (cont’d)  Want to keep credit balances when:  assets – (PFB + COB) > funding target  Why?  no required quarterlies next year when funded status (on this basis) is 100% or more  can use credit balances to offset minimum contr  What to do?  waive enough COB & PFB to reach 100% on this basis
  22. 22. Credit Balance Mgmt (cont’d)  Want to (or have to) get rid of balances when:  assets – (PFB + COB) < 60, 80 or 100% of FT  Why?  <60%: hard benefit restrictions, at-risk status  <80%: soft benefit restrictions, can’t offset min contr  <100%: quarterly contributions next year  What to do?  mandatory waiver to avoid benefit restrictions  waive enough to reach 100% funding
  23. 23. Credit Balance Mgmt (cont’d)  Don’t generate new prefunding balances when you’re waiving to reach 60, 80 or 100%  Why?  COB’s are slightly better than PFB’s  carryover balances must be waived before PFB’s  generating new PFB’s forces waiver of more COB’s  What to do?  don’t elect to generate new PFB’s, or  revoke standing PFB election, if you’ve made one
  24. 24. What We’ve Covered  PPA refresher: funding and benefit restrictions  Differences between proposed and final regs  Surprising provisions  Funding strategies  Credit balance management
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