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

Jim Van IwaardenConsulting Actuary

Van Iwaarden AssociatesMinneapolis, 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.

Topics

PPA refresher: funding and benefit restrictions

Differences between proposed and final regs

Surprising provisions

Funding strategies

Credit balance management

Poll #1

I am:

A. A plan sponsor, serving my employer’s plans

B. A practitioner, serving many plans

C. A casual observer

PPA Refresher:The New Language

Old Name New Name Differences

Credit BalanceCarryover 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 PercentageFunding Target Attainment

Percentage (FTAP), Adjusted (AFTAP)

Credit balances usually deducted

from assets

Unfunded CL Shortfall Based on funding target

PPA Refresher:New Minimum Contribution

Minimum required contribution (MRC) is:

target normal cost

PLUS shortfall amortization (7 years)

MINUS credit balance (sometimes)

PPA Refresher:Funding Goals

Most phased in 2008 – 2011

Consequences for not reaching goals

Some WRERA relief

PPA Refresher:Funding Goals

AFTAP Consequences of Underfunding WRERA Relief

60% in 2008“Hard” benefit restrictions:

No benefit accrualsNo 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 targetNonqualified funding restrictions for top 5

No relief

PPA Refresher:Funding Goals (continued)

Goal / Phase-In

Consequences of Underfunding WRERA Relief

80%

Can’t use credit balance to reduce next year’s contributions

“Soft” benefit restrictions:No benefit increase amendmentsLump 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

Amortizationbased on phase-in,

not 100%

100% Quarterly contributions next year No relief

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

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

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

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

Poll #2I 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

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

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

Surprising Provisions (cont’d)

Confiscated credit balancesPresumed AFTAP at BOY = same as last yearSuppose 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

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 feasibleManage credit balances to avoid hassles

Credit Balance Management

When to keep COB’s & PFB’s

When to get rid of them

When to not even generate them

Credit Balance Mgmt (cont’d)

Watch out! Several versions of FTAP:For AFTAP cert, deduct PFB & COB if assets<FTFor quarterly trigger: always deduct PFB & COBFor shortfall exemption & CB use: deduct only PFB

Can have quarterlies even if LY AFTAP>100%

COB’s are slightly better than PFB’s

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

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 restrictionswaive enough to reach 100% funding

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

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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