Ea-2F - Minimum Funding Standards For Multiemployer Plans (Irc Section 431)

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The minimum required contribution for plan years beginning after 12/31/2007 is equal to

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the difference between the charges and credits in the funding standard account.

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Funding standard account charges (IRC section 431(b)(2))

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- Normal cost

- Amortization charges (based upon valuation interest rate)

- Prior funding deficiency

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Amortization charges (based upon valuation interest rate)

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- Continued amortization of all bases in effect prior to 2008, using same periods of amortization and methods as in effect prior to 2008

- Initial amortization base amortized over 15 years for plans that come into existence after 2007 (pre-2008 amortization period generally 30 years, but 40 years – established on 1/1/1976 – if effective before 1974)

- Increases in past service liability due to plan amendments amortized over 15 years (pre-2008 amortization period 30 years)

- Experience losses amortized over 15 years (pre-2008 amortization period 15 years)

- Losses due to changes in actuarial assumptions amortized over 15 years (pre-2008 amortization period 30 years)

- Waived funding deficiencies amortized over 15 years (pre-2008 amortization period 15 years). Note that waived deficiency bases first amortized in years before 2008 may have been using an interest rate other than the valuation interest rate for amortization for years prior to 2008.

- OBRA’87 full funding credit bases are amortized over 20 years

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Amort Periods (pre-08)

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Initial amort base - 30 years (1/1/1976 base 40 years)

Plan Amendments - 30 years

Experience GL - 15 years

Change in Assumptions - 30 years

Waived Funding Deficiency - 15 years

OBRA '87 FFC bases - 20 years

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Amort Periods (post-08)

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Initial amort base - 15 years

Plan Amendments - 15 years

Experience GL - 15 years

Change in Assumptions - 15 years

Waived Funding Deficiency - 15 years

OBRA '87 FFC bases - 20 years

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Funding standard account credits (IRC section 431(b)(3))

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- Amortization credits (based upon valuation interest rate)

- Contributions

- Full funding credit

- Prior credit balance

- Waived funding deficiency

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Amortization credits (based upon valuation interest rate)

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- Continued amortization of all bases in effect prior to 2008, using same periods of amortization and methods as in effect prior to 2008

- Decreases in past service liability due to plan amendments amortized over 15 years (pre-2008 amortization period 30 years)

- Experience gains amortized over 15 years (pre-2008 amortization period 15 years)

- Gains due to changes in actuarial assumptions amortized over 15 years (pre-2008 amortization period 30 years)

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Amort Periods (pre-08)

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Decrease due to Plan Amendment - 30 years

Experience gain - 15 years

Gain due to change in assumptions - 30

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Amort Periods (post-07)

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Decrease due to Plan Amendment - 15 years

Experience gain - 15 years

Gain due to change in assumptions - 15

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Amortization bases may be

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combined and offset.

Note that it is not necessary to know how this is done for purposes of the exam because this is described in a 1981 proposed regulation that was never finalized, and thus cannot be tested.

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The amortization period of the charge bases (other than the waiver bases) may be extended under IRC section 431(d) for up to

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5 years upon an approved application to

the IRS. (There is a limited alternative to allow the extension for up to 10 years.)

- The plan cannot be amended to increase benefit liabilities while an extension of the amortization period of any base is in effect, unless the amendment only provides for a de minimis increase in the liabilities.

-The extension is not allowed for experience gain/loss bases using the funding

relief extension provided under IRC section 431(b)(8).

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Special amortization periods under funding relief (IRC section 431(b)(8) and Revenue Notice 2010-83)

A plan can elect to extend the amortization period of a portion of experience gain/loss bases due to

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eligible net investment losses from either/both of the two plan years ending after August 31, 2008 (the 2008 and 2009 calendar years for calendar year plans). The extended amortization period is 30 years.

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Special amortization periods under funding relief (IRC section 431(b)(8) and Revenue Notice 2010-83)

The net investment loss is generally equal to

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the excess of the expected market value of assets as of the end of the year over the actual market value of assets as of the end of the year.

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Special amortization periods under funding relief (IRC section 431(b)(8) and Revenue Notice 2010-83)

The expected market value of assets is equal to

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the market value as of the first day of the year plus the contributions made during the year minus the disbursements made during the year. Each amount is adjusted with interest to the end of the year using the valuation interest rate for the year.

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Special amortization periods under funding relief (IRC section 431(b)(8) and Revenue Notice 2010-83)

The plan may be restricted from making a plan amendment increasing prior benefit accruals for

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the two years following the creation of an amortization base using the special extension rule.

- There is no restriction if an additional contribution is made to the plan to

cover the increase in benefits, and the plan’s funded percentage and projected credit balances for the two plan years are reasonably expected to be at least as high as they would have been if the benefit increases had not been adopted.

- There is no restriction if the amendment is needed to comply with the Internal Revenue Code or other applicable law.

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Special amortization periods under funding relief (IRC section 431(b)(8) and Revenue Notice 2010-83)

Notice must be given to plan participants and beneficiaries that the special amortization rules will apply. The PBGC must receive a copy of this notice.

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True

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Actuarial assumptions must each

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each be reasonable, and, in combination with all other actuarial assumptions, must represent the actuary’s best estimate of anticipated experience under the plan.

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The assumed interest rate is the same as

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was allowed to be used for years prior to 2008 (a reasonable best estimate of the actuary).

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Withdrawal liability payments are considered

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employer contributions for the funding standard account.

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Balance equation for plans with unfunded accrued liability

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- The balance equation states that the unfunded accrued liability must be equal to the sum of the outstanding balances of the individual amortization bases less the credit balance (or plus the funding deficiency)

- The outstanding balance of an individual amortization base is equal to the amortization charge (credit) associated with the base multiplied by the present value of future payment factor for the base

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Any reasonable actuarial cost method may be used to determine

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the normal cost, accrued liability, past service liability, and experience gains and losses. See the section in this outline concerning actuarial cost methods for detailed descriptions of these items.

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Any reasonable method of determining actuarial value of assets may be used.

IRC section 412(c)(2)(A) provides that an actuarial value can be used provided that it is reasonable and takes fair market value into account. IRS regulation 1.412(c)(2)-1(b) provides the following rules that must be followed for the actuarial value to be deemed reasonable.

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- The method cannot be designed to consistently give an actuarial value that is higher or lower than the market value. For example, using 95% of market value as a definition of actuarial value would not be allowed.

- The actuarial value must be within 20% above or below the fair market value. If the actuarial value is less than 80% or more than 120% of the fair market value, then the actuarial value is adjusted to the closest corridor limit.

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Exam note: A general condition of the examination is that asset values provided in the questions include receivable contributions for the prior year (that is, contributions receivable for minimum funding purposes). The assets may need to be adjusted by the credit balance in the funding standard account or by undedicated contributions, depending upon the funding method being used. Unlike for single employer plans, the receivable contributions are not interest- adjusted.

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True

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There are two methods (each with and without phase-in) for determining actuarial value of assets described in the regulations that are deemed to satisfy the asset valuation method requirements (although the 20% corridor limits must be checked).

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- The average value method

- The smoothed value method

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The average value method states that the actuarial value of assets is equal to

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the average of the fair market values as of the each of the most recent valuation dates (not to exceed 5), each adjusted for all contributions, benefit payments, interest and dividend payments, and plan expenses that have occurred from the prior valuation date to the current valuation date. Note that realized and unrealized gains and losses are not used in this adjustment.

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The average value method (with phase-in)

provides for two phase-in methods when changing to the average value method from another asset valuation method.

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- Section 3.12 states that the average value method can be applied such that in the first year that it is used, the adjusted value of assets for the first prior year is deemed to be the adjusted value for each prior year. In the second year the method is used, the adjusted value of assets for the second prior year is deemed to be the adjusted value for all years prior to the second prior year. This process continues each year until the average value method is fully phased in.

- Section 3.17 states that the average value method can be applied such that in the first year that it is used, the actuarial value of assets is equal to the market value of assets. In the second year, the actuarial value is calculated as in the phase-in under section 3.12, except the averaging period is two years. The next year the averaging period is three years, and so on until the there is full phase-in.

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The smoothed value method (see Revenue Procedure 2000-40, section 3.15) states that the actuarial value of assets is equal to

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the market value of assets as of the valuation date, less a fraction of the gain (or plus a fraction of the loss) for each prior year (up to 4 years). The fraction decreases for each year’s gain or loss. For example, if the smoothing period is the full five years, the additions or subtractions to the current year’s market value would be:

- 4/5 of the prior year’s gain or loss
- 3/5 of the second prior year’s gain or loss

- 2/5 of the third prior year’s gain or loss
- 1/5 of the fourth prior year’s gain or loss

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The smoothed value GL is determined to be:

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the difference between the actual gain or loss and the expected gain or loss (using the valuation interest rate to determine the expected gain or loss). Either simple interest or compound interest can be used to determine the expected gain or loss.

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The smoothed value method (with phase-in) (see Revenue Procedure 2000-40, section 3.16) states that the application of a fraction of the prior year’s gains or losses is phased in.

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So, if the smoothing period were 5 years, in the first year that the method is used, the actuarial value of assets is the market value of assets. In the second year, the actuarial value of assets would be equal to the market value of assets plus or minus 4/5 of the prior year’s gain or loss. In the third year, the actuarial value of assets would be equal to the market value of assets plus or minus 4/5 of the prior year’s gain or loss, plus or minus 3/5 of the second prior year’s gain or loss. This process would continue until phase-in is complete.