Ea-2F - Minimum Funding Standards For Single Employer

Front 1

The minimum required contribution is generally equal to the sum of:

Back 1

- The target normal cost for the year

- The shortfall amortization charge for the year

- The waiver amortization charge for the year

Front 2

If the value of the plan assets is at least as large as the funding target for the year, then the minimum required contribution is equal to

Back 2

to the target normal cost, reduced by the excess of the value of the plan assets over the funding target. In no event can the minimum required contribution be less than $0.

Front 3

The value of the plan assets is generally reduced by

Back 3

the pre funding balance and funding standard carryover balance. Note that the general conditions of the exam state that the assets provided in an exam question have not been adjusted by these items, unless you are specifically told otherwise.

Front 4

The target normal cost is equal to

Back 4

the difference between the present value of

the end of year accrued benefit and the present value of the beginning of year accrued benefit (increased by the expected plan-related expenses for the year, and reduced by the expected mandatory employee contributions for the year).

Front 5

TNC - The beginning of year accrued benefit does not take into account any

Back 5

salary increase for the current year.

Front 6

TNC - The end of year accrued benefit does take not account any

Back 6

salary increase for the current year. You cannot project the current year increase past the end of the current year.

Front 7

TNC - Accrued benefits include

Back 7

top heavy minimums under IRC section 416 and are subject to the benefit limits of IRC section 415.

Front 8

TNC - Compensation must be

Back 8

limited as required by IRC section 401(a)(17).

Front 9

TNC - For a cash balance/hybrid plan, the accrued benefit is

Back 9

account balance, accumulated to the assumed retirement age using the plan’s future interest

crediting rate.

Front 10

Funding target - The funding target is equal to

Back 10

the present value of the beginning of year accrued benefit.

Front 11

Funding target - The beginning of year accrued benefit does not

Back 11

take into account any salary increase for the current year.

Front 12

Funding target - Accrued benefits include

Back 12

top heavy minimums under IRC section 416 and are subject to the benefit limits of IRC section 415.

Front 13

Funding Target - Compensation must be

Back 13

limited as required by IRC section 401(a)(17).

Front 14

Funding Target - For a cash balance/hybrid plan, the accrued benefit is

Back 14

the account balance, accumulated to the assumed retirement age using the plan’s future interest crediting rate.

Front 15

Funding Target - The funding target attainment percentage (FTAP)

Back 15

is equal to the ratio of the value of the plan assets to the funding target (without regard to at-risk assumptions).

The value of the plan assets are generally reduced by the prefunding

balance and funding standard carryover balance.

If the funding target is equal to zero, then the FTAP is equal to 100%

Front 16

Allocation of benefits between funding target and target normal cost (Treasury regulation 1.430(d)-1(c)(1)(ii))

The benefits are generally allocated between the funding target and target normal cost based upon

Back 16

the actual accrual of benefits, or the crediting of years of service.

Front 17

Allocation of benefits between funding target and target normal cost (Treasury regulation 1.430(d)-1(c)(1)(ii))

For benefits that are not earned based on service or accrual, such as a supplemental benefit,

Back 17

the allocation is made pro-rata based upon service to date (for allocation to the funding target) and one year of service (for allocation to the target normal cost) as a percentage of total service at retirement.

Front 18

Effect of plan amendments on target normal cost and funding target

A plan amendment deemed to be effective for the current year

Back 18

under IRC section 412(d)(2) is applied for purposes of determining both the target normal cost and the funding target. So, even if the amendment is either adopted or effective after the valuation date, if the plan sponsor has elected to determine the minimum required contribution by taking into account the plan amendment, then it is applied as if it became effective on the first day of the plan year.

Front 19

Effect of plan amendments on target normal cost and funding target

Exception to plan amendment rules: If the plan amendment becomes effective or is adopted after the first day of the year, and the amendment increases benefits with regard to future service only (so that it would impact only the target normal cost and not the funding target), it must be

Back 19

taken into account if it would cause the restrictions on plan amendments under IRC section 436(c) to apply if the increase were included in the plan’s funding target (that is, the AFTAP would fall below 80% if the increase is included as part of the funding target). This is necessary to prevent a situation where a plan amendment becomes effective or is adopted after the valuation date for the sole purpose of avoiding the planamendment requirements of IRC section 436(c).

Front 20

Coordination with IRC section 436 restrictions

Benefits not paid or accrued as of the valuation date due to restrictions under IRC section 436 must

Back 20

generally not be included in the determination of the target normal cost and funding target.

Front 21

Coordination with IRC section 436 restrictions

The determination of the target normal cost and funding target cannot take into account any assumption with regard to

Back 21

any possible future restriction after the valuation date due to IRC section 436.

Front 22

Plan population

For purposes of determining the target normal cost and funding target, the plan

population included in the valuation must include

Back 22

participants currently employed by the employer, participants who are retired or no longer employed by the employer, and any other individuals (such as beneficiaries of deceased participants) entitled to benefits under the plan.

Front 23

Plan population

Terminated non vested participants can be disregarded once they have at least

Back 23

5 consecutive years of breaks in service.

However, if the plan’s experience with regard to nonvested terminated participants has been that they have generally not returned to service, then those nonvested terminated participants can be excluded from the valuation sooner than the 5 years.

Front 24

Plan population

Current employees not yet eligible to participate in the plan can be

Back 24

included in the valuation, in anticipation of their eventual entry into the plan.

Front 25

Funding shortfall (IRC section 430(c))

There is a funding shortfall if

Back 25

the funding target attainment percentage is less

than 100%.

Front 26

Funding shortfall (IRC section 430(c))

The funding shortfall is equal to

Back 26

the difference between the funding target and

the value of the plan assets (reduced by the prefunding balance and funding standard carryover balance).

The funding shortfall cannot be less than $0.

Note that the funding target for the funding shortfall is based upon the funding target after applying the at-risk assumptions and any phase-in, if applicable.

Front 27

Shortfall amortization base

The shortfall amortization base is equal to

Back 27

the difference between the funding shortfall and the outstanding balance of the prior shortfall and waiver amortization bases.

This can result in a new negative base.

Front 28

Shortfall amortization base

If the funding shortfall for the current year is $0, then

Back 28

There is no new funding shortfall amortization base for the year, and

The prior funding shortfall amortization bases are deemed to be fully

amortized.

Front 29

Shortfall amortization base

The shortfall amortization installment is an amortization of the shortfall amortization base over a period of

Back 29

7 years using the segmented interest rates under IRC section 430(h)(2)(C).

Since it is amortized over 7 years, the segment 1 interest rate is used to discount the first 5 payments, and the segment 2 interest rate is used to discount the last two payments. The amortization installment remains the same for each of the 7 years. There is no re-amortization for changes in interest rates. After 7 years, the shortfall amortization base is fully amortized.

Front 30

Shortfall amortization base

The shortfall amortization charge is equal to

Back 30

the sum of the shortfall amortization installments with regard to the current year shortfall amortization base and each of the shortfall amortization bases established for any of the 6 prior years. The shortfall amortization charge (net amount of the installments) cannot be less than zero, although individual installments can be less than zero when there are negative bases.

Front 31

Shortfall amortization base

A shortfall amortization installment is pro-rated

Back 31

for short plan years. A final pro- rated installment is required in the 8th year in an amount equal to the difference between the full installment and the pro-rated installment (with no interest adjustment). See IRS proposed regulation 1.430(a)-1(b)(2)(ii).

Front 32

Shortfall amortization base

The outstanding balance of a shortfall amortization base as of a valuation date is equal to

Back 32

the present value of the remaining payments using the segmented interest rates in effect for the valuation date (not the original segmented rates used to amortize the base).

Front 33

Exemption from new shortfall amortization base

A plan is exempt from creating a new shortfall amortization base for a plan year if

Back 33

the valuation assets are at least as large as the funding target.

For this purpose, the valuation assets are not reduced by the funding standard carryover balance, but are reduced by the entire prefunding balance (but only if the employer has elected to use any portion of the prefunding balance for the year to reduce the minimum funding requirement).

Front 34

Optional amortization periods for shortfall bases (IRC section 430(c)(2)(D) and Revenue Notice 2011-03)

Back 34

Options available for no more than 2 years out of years beginning in 2008, 2009, 2010 and 2011. However, no option is available for years in which the due date for minimum funding is before 6/25/2010. So, in effect, plan years for which the election is available are plan years ending on or after 10/10/2009 and beginning no later than 12/31/2011.

Front 35

Optional amortization periods

A 9-year option (referred to as 2 plus 7 amortization schedule) is available.

Back 35

Amortization installment for each of the first two years is equal to interest only at the plan effective rate for the year the base is established.

Amortization installment for each of the final 7 years is equal to an amount such that the present value of the 2 interest only payments plus the final 7 payments is equal to the shortfall base using the segment rates (or rates from the full yield curve, if that is what the plan is using) for the year the base is established.

Front 36

Optional amortization periods

A 15-year option is available.

Back 36

Amortization installment for each year is equal to a 15-year amortization of the shortfall base using the segment rates for the year the base is established.

Front 37

Optional amortization periods

If an option is elected for two years, then

Back 37

the same option (9-year or 15-year) must be used for each option year.

Front 38

Optional amortization periods

Installment must be increased (but not above the required regular 7-year installment, applied on a cumulative basis

Back 38

dollar-for-dollar for salary paid to any individuals in excess of 1 million dollars (subject to cost of living increases for years after 2010), or for any extraordinary dividend payments. (See IRC section 430(c)(7).)

The increase applies for only the first 3 years if the 2 plus 7 amortization schedule is elected.

The increase applies for only the first 5 years if the 15 year schedule is elected.

Front 39

Optional amortization periods

The increased installment under Q&A I-4 of Revenue Notice 2011-03 (as mentioned above) is capped at

Back 39

The difference between the cumulative amortization installments using the 7-year amortization schedule and the cumulative amortization installments using the elected schedule. See question 14 for an example of this.

Front 40

Optional amortization periods

The increase reduces future installments. Q&A I-3 in Revenue Notice 2011-03 describes the details of how this reduction is determined. Basically, the reduction is made to

Back 40

the chronological final installments. See question 15 for an example of this.

The increase is disregarded for the quarterly contribution requirement.

Front 41

Optional amortization periods

Election to use option cannot be revoked without IRS approval.

Back 41

True

Front 42

Optional amortization periods

Notification of the election must be made to

Back 42

participants, beneficiaries and the

PBGC (for plans covered by the PBGC). The notification to participants and beneficiaries must be provided by the later of 120 days after the end of the plan year for which the election is made, or May 2, 2011. The notification to the PBGC must be provided by the later of 120 days after the end of the plan year for which the election is made, or January 31, 2011.

Front 43

Optional amortization periods

Generally, each employer in a multiple employer plan must make

Back 43

make a separate election to use an alternative amortization schedule. Different employers may elect to use a different schedule, and some employers may decide not to elect to use an alternative schedule.

Front 44

Optional amortization periods

The election must be signed by

Back 44

the plan sponsor and provided to the enrolled actuary and the plan administrator

Front 45

Optional amortization periods

The election must be made by the latest of:

Back 45

- The last day of the plan year for which the election is made;

- 30 days after the valuation date of the plan year for which the election is

made; or

- January 31, 2011

Front 46

A waiver amortization base is created if

Back 46

there is a waived funding deficiency

under IRC section 412(c) for a previous plan year. Note that a funding deficiency (and if waived, the amount of the waived funding deficiency) is determined as of the valuation date for the year.

For years prior to 2008, when the old funding standard account rules applied, the funding deficiency (and waived funding deficiency) was always determined as of the close of the plan year.

Front 47

The waiver amortization installment is an amortization of

Back 47

the waiver amortization base over a period of 5 years using the segmented interest rates under IRC section 430(h)(2)(C). The amortization installment remains the same for each of the 5 years. There is no re-amortization for changes in interest rates. After 5 years, the waiver amortization base is fully amortized.

Front 48

The waiver amortization charge is equal to

Back 48

the sum of the waiver amortization installments with regard to the current year waiver amortization base and each of the waiver amortization bases established for any of the 4 prior years

Front 49

The interest rate used to amortize a waiver amortization installment is

Back 49

based upon the segmented interest rates that applied to the plan for the year for which the waiver is granted (not the year the waiver is first amortized).

See IRS proposed regulation 1.430(a)-1(d)(1). The amortization installments are determined using the amount of the waived deficiency. As a result, since amortization begins in the following year, the first installment will generally be one year after the waived deficiency arose (on the next valuation date), so the 5 payments will be made 1, 2, 3, 4 and 5 years after the date the deficiency was waived. That 5th payment will involve the second segment interest rate. See example 3 in IRS proposed regulation 1.430(a)-1(g).

Front 50

The outstanding balance of a waiver amortization base on a valuation date is equal to

Back 50

the present value of the remaining payments using the segment 1 interest rate in effect for the valuation date (not the original segmented rates used to amortize the base).

Front 51

A waiver amortization installment is pro-rated for

Back 51

short plan years. A final pro- rated installment is required in the 6th year in an amount equal to the difference between the full installment and the pro-rated installment. See IRS proposed regulation 1.430(a)-1(b)(2)(ii).

Front 52

The prior waiver amortization bases are deemed to be fully amortized if

Back 52

the funding shortfall is $0.

Front 53

The initial funding standard carryover balance as of the first day of the 2008 plan year is equal to

Back 53

the credit balance in the funding standard account as of the last day of the year prior to 2008.

Front 54

Anyportionofthefundingstandardcarryoverbalancecanbeelectedbytheplan sponsor to be used to

Back 54

reduce the minimum required contribution by subtracting that portion from the minimum as of the first day of the plan year. There is a general exam condition that states that the employer elects to use the funding standard carryover balance in this manner, unless you are told otherwise.

Front 55

The funding balance election must be made by

Back 55

the minimum funding due date, and the election is generally irrevocable. However, the election can be revoked if the amount of the revocation represents application of the funding standard carryover balance in excess of the minimum required contribution.

Front 56

A standing election may be made with regard to

Back 56

the use of the funding standard carryover balance such that it would be used to reduce the minimum required contribution to the extent that the plan would otherwise have a funding deficiency. The standing election must be signed by the plan sponsor by the minimum funding due date for the year to which it will apply, and must name the enrolled actuary providing certification to the plan. If the plan enrolled actuary is replaced, then a new standing election must be provided to the new enrolled actuary (otherwise the standing election no longer exists) no later than the due date (with extensions) to the Form 5500. Standing elections are deemed to be effective on the due date of the Form 5500. The standing election can be revoked, as long as that is done prior to the due date of the Form 5500.

Front 57

The funding standard carryover balance is not available in a year when

Back 57

the ratio of the value of plan assets (reduced by the prefunding balance) for the prior year to the funding target for the prior year is less than 80% (for this purpose, use the not-at-risk funding target if the plan is at risk). For new plans, the funding ratio is deemed to be 80% in the first year if the funding target is zero. There is a general exam condition that states that the plan was at least 80% funded in the prior year, unless you are told otherwise or given information to be able to determine the prior year funded percentage.

Front 58

If the valuation date is not the first day of the plan year, the funding standard carryover balance is

Back 58

increased with interest from the first day of the year to the valuation date using the plan’s effective interest rate for the year for purposes of applying it to the current year valuation.

Front 59

The unused prior year funding standard carryover balance is increased

Back 59

with interest based upon the prior year rate of return on the plan assets (note that this is not the valuation interest rate). This interest is credited from the valuation date for the current year (the year the funding standard carryover balance is applied to the minimum required contribution) to the beginning of the following year. If the valuation date is not the first day of the year, the unused funding standard carryover balance must first be discounted to the first day of the year using the effective interest rate, and then increased to the first day of the following year using the rate of return on the assets.

Front 60

Prefunding balance

For 2008

Back 60

there is no prefunding balance.

Front 61

Prefunding balance

The increase in the prefunding balance each year is equal to

Back 61

the excess of the contributions for the preceding year over the minimum required contribution (generally without reduction for any credit balance items) for the preceding year.

The plan sponsor must make an election to apply (add) those excess contributions to the prefunding balance.

Front 62

Prefunding balance

The contribution, if elected, that is added to the prefunding balance is equal

Back 62

to the contribution determined as of the current year valuation date, increased using the current year plan effective rate to the beginning of the following year

There is a general exam condition that states that the employer elects to credit the excess contributions in this manner, unless

you are told otherwise.

Front 63

If the employer has elected to use a portion of the funding standard carryover balance and/or the prefunding balance to reduce the minimum required contribution, then the portion of the excess contribution attributable to that reduction amount is increased using

Back 63

the asset rate of return instead of the plan effective rate (see Treasury Regulation 1.430(f)-1(b)(3)(iii)).

Front 64

The election to make an addition to the pre funding balance must be made by

Back 64

the minimum funding due date, and the election is generally irrevocable. However, the election can be revoked under the same conditions as described for the funding standard carryover balance.

Front 65

A standing election may be made with regard to the use of the prefunding balance in the same manner as it can be made for the funding standard carryover balance.

Back 65

True

Front 66

Contributions for the preceding year must be adjusted

Back 66

with that year’s effective rate of interest from the date contributed (even if contributed after the end of the plan year but within the 81⁄2 month funding period) to the first day of the current year.

Contributions are assumed to first be used to meet the minimum funding requirement for the prior year. Contributions deposited to avoid funding-based benefit limitations under IRC section 436 are excluded for this purpose.

Front 67

Any portion of the prefunding balance can be elected by the plan sponsor to be used to reduce the minimum required contribution by subtracting that portion from the minimum as of the first day of the plan year.

Back 67

True

However, the prefunding balance cannot be used if there is also a funding standard carryover balance. The prefunding balance can be used in a year once the funding standard carryover balance is totally used up. There is a general exam condition that states that the employer elects to use the prefunding balance in this manner, unless you are told otherwise.

Front 68

The prefunding balance is not available in a year when the ratio of the value of plan assets (reduced by the prefunding balance) for the prior year to the funding target for the prior year is less than

Back 68

80%.

This rule is the same as for the funding standard carryover balance.

Front 69

If the valuation date is not the first day of the plan year, the prefunding balanceis

Back 69

increased with interest from the first day of the year to the valuation date using the plan’s effective interest rate for the year for purposes of applying it to the current year valuation.

Front 70

The unused prior year pre funding balance is increased with interest based upon the

Back 70

prior year rate of return on the plan assets (note that this is not the valuation interest rate).

This interest is credited from the valuation date for the current year (the year the prefunding balance is applied to the minimum required contribution) to the beginning of the following year. If the valuation date is not the first day of the year, the unused prefunding balance must first be discounted to the first day of the year using the effective interest rate, and then increased to the first day of the following year using the rate of return on the assets.

Front 71

An excess contribution can apply towards the prefunding balance in situations where

Back 71

part or all of the funding standard carryover balance and/or the existing prefunding balance are used to reduce the minimum required contribution.

In that case, the portion of the excess contribution that was in excess solely on account of the use of the credit balance(s) must be increased to the next valuation date with the asset rate of return.

Front 72

Election to reduce funding standard carryover balance and prefunding balance

The plan sponsor can elect to reduce the funding standard carryover balance or prefunding balance prior to

Back 72

any determination of the value of the plan assets for the plan year. This election could prevent the plan from being considered at-risk,

or could prevent the plan from being restricted under IRC section 436.

Front 73

Election to reduce funding standard carryover balance and prefunding balance

Any elected reduction must be made to the funding standard carryover balance first;

Back 73

once the funding standard carryover balance is reduced to $0, then the plan sponsor can elect to reduce the prefunding balance.

Front 74

Election to reduce funding standard carryover balance and prefunding balance

The election to reduce the balances must be made no later than

Back 74

the end of the plan year.

Front 75

Election to reduce funding standard carryover balance and prefunding balance

Although elections (reduction in balance, use of balance to offset minimum required contribution) are generally deemed to occur chronologically,

Back 75

if an election is made to reduce a credit balance item, it is always deemed to occur on the first day of the year, before any other elections apply. It is possible that this can result in a missed quarterly contribution, if the credit balance item was used to satisfy that requirement. This can also have an effect on the amount of the credit balances available for the prior plan year. The reduced credit balance as of the beginning of the current year must be discounted using the prior year’s asset rate of return to the prior year’s valuation date in order to determine the amount of the credit balance available for the prior year.

Front 76

There is a general exam condition that states that the employer does not elect to reduce the funding standard carryover balance or the prefunding balance unless you are told otherwise.

Back 76

True

Front 77

Effect of reducing funding standard carryover balance and/or prefunding balance

Back 77

May allow a plan to avoid one or more of the benefit restrictions under

IRC section 436

May allow the plan to avoid being at-risk in the following year

Front 78

Valuation of assets and liabilities (IRC section 430(g))

The valuation date must generally be

Back 78

the first day of the plan year.

Front 79

Valuation of assets and liabilities (IRC section 430(g))

For plans with 100 or fewer participants (including active and inactive participants) on each day of the prior year, the valuation date may be

Back 79

any day during the plan year.

All non-multiemployer defined benefit plans maintained by the same employer (within the controlled group) must be combined for purposes of the participant count.

For the first year of a plan, the size of the plan is based upon a reasonable estimate of the number of participants on each day during the first plan year.

Front 80

Valuation of assets and liabilities (IRC section 430(g))

A change in the valuation date is treated as

Back 80

a change in the funding method.

Automatic approval for a change in the valuation date required under IRC section 430 is granted under Treasury regulation 1.430(g)-1(b)(2)(iv). An example of the automatic approval would be a small plan using a last day valuation that no longer qualifies as a small plan and must change to a first day valuation.

Front 81

Valuation of assets and liabilities (IRC section 430(g))

The value of plan assets is generally

Back 81

fair market value.

There is an option to use an averaging of the fair market value of assets. See IRC section 430(g)(3)(B) and Revenue Notice 2009-22.

The actuarial value is based upon an average of the fair market value on the valuation date and the adjusted fair market values determined for one or more determination dates (on dates prior to the valuation date).

The adjusted fair market value for each determination date is equal to the fair market value on the determination date, increased by contributions included in the fair market value on the valuation date that were not included in the fair market value on the determination date, and reduced by benefits and administrative expenses paid by the plan between the determination date and the current valuation date. An adjustment is also made for expected earnings.

Front 82

Valuation of assets and liabilities (IRC section 430(g))

Assets transferred out of the plan with regard to a spin-off are treated as

Back 82

a distribution, and assets transferred into the plan from another plan are treated as contributions.

Front 83

Valuation of assets and liabilities (IRC section 430(g))

The adjustment to the fair market value for a determination date due to the expected earnings is made from the determination date to the valuation date. The expected earnings must be based upon

Back 83

the actuary’s best estimate of expected earnings during the period, but in no event can this exceed the third segment interest rate that applies for the year in which the expected earnings are determined. A spot third segment interest rate is used for the limitation on expected earnings for years before 2008, and an average of the third segment interest rates over the 24-month period ending prior to the valuation month is generally used for the limitation when the full yield curve is used to value the plan rather than the three segment interest rates.

Front 84

Valuation of assets and liabilities (IRC section 430(g))

Cannot average over a period of more than

Back 84

approximately 2 years (averaging period cannot begin before the last day of the 25th month before the valuation month, and cannot end after the valuation date).

Front 85

Valuation of assets and liabilities (IRC section 430(g))

The time period between the determination dates chosen during the “25- month” period must be in

Back 85

equal increments, and cannot be more than 12 months apart. For example, for determining the average value as of 1/1/2012, asset determination dates of 1/1/2010, 7/1/2010, 1/1/2011 and 7/1/2011 can be chosen since they are all spaced 6 months apart.

Front 86

The average value (after adjustments for receivable contributions or excludable contributions, as outlined below) cannot be less than

Back 86

90% or more than 110% of the fair market value of assets (also adjusted for the receivable and excludable contributions).

Front 87

A change in the method of valuing assets is treated as

Back 87

a change in the funding method.

Front 88

Contributions receivable for the prior year (contributed on or before the minimum funding due date)

Back 88

must be included in the value of assets.

For years after 2008, if they were deposited after the first day of the current year, they must be discounted with interest using the prior plan year’s effective rate of interest for valuation purposes from the date deposited to the current year valuation date.

For the 2008 year, the receivable contribution is added to the value of assets without regard to the interest discount.

There is a general exam condition that states that the receivable contributions are included in the assets, unless you are told otherwise.

Front 89

Contributions made for the current year and prior to the valuation date must be

Back 89

excluded from the value of assets.

Interest is credited to these contributions using the effective rate of interest for valuation purposes for the current year from the date contributed to the valuation date. This interest is excluded from the value of assets as well as the contribution.

Note that contributions made before the first day of the plan year cannot be applied to the current year (they must be designated as contributed for the prior year) and are not excluded from the value of assets.

The typical situation where there would be contributions made for the current year and prior to the valuation date would be in the case of an end of year valuation.

If the subtraction of these contributions results in an asset value less than zero, then the asset value is deemed to be zero.

Front 90

A change in the funding method due to a change in the valuation date, or asset valuation method only for the plan years beginning in 2008, 2009, or 2010

Back 90

has automatic approval (Treasury regulation 1.430(g)-1(f)(3)). There is currently no automatic approval for years after 2010.

Front 91

Actuarial assumptions and methods (IRC section 430(h))

The assumptions and methods must each be

Back 91

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

Front 92

Actuarial assumptions and methods (IRC section 430(h))

Interest rates

The effective interest rate is

Back 92

the single rate which would produce the present value of accrued benefits equal to the funding target (without regard to at-risk assumptions). If the funding target for the year is zero, then the target normal cost is used in place of the funding target.

Front 93

Actuarial assumptions and methods (IRC section 430(h))

Interest rates

Segment interest rates are generally used to

Back 93

determine the funding target, target normal cost, and amortize bases.

Segment interest rates are based on an average of monthly corporate bond yield curves for the 24-month period ending on the month prior to the date for which the rate is published.

Each segment interest rate is used to calculate the present value of benefits expected to be paid during that segment period.

The corporate bond yield curve reflects the average monthly yield on investment grade corporate bonds at the top 3 quality levels during the prior 24 month period.

Front 94

Actuarial assumptions and methods (IRC section 430(h))

The plan sponsor may elect to use the full corporate bond yield curve (without regard to the 24-month averaging) instead of the segmented rates (for minimum required contribution only – the segmented rates must be used for other purposes).

Back 94

Once selected, this election can only be changed with IRS approval (it is deemed to be part of the funding method). Note that if the plan sponsor initially elects to use the segment rates and subsequently decides to change to the use of the full yield curve in a later year, that initial change to the full yield curve is not subject to IRS approval (regulation 1.430(h)(2)-1(e)(1)).

Front 95

The corporate bond yield curve rates and segment rates are published

Back 95

monthly by the IRS.

Front 96

The rate used for a valuation must be either

Back 96

the one published for the valuation month, or any of the 4 preceding months. The month elected is deemed to be the “applicable month.” Once the choice of month is selected, the election can only be changed with IRS approval (it is deemed as part of the funding method). Note that if the full corporate bond yield curve (without regard to averaging) is used, then the month that includes the valuation date must be used to determine the interest rate (the prior 4 months are not available).

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Determination of MAP-21 adjusted segment rates (Revenue Notice 2012-61)

Each of the 3 segment rates is adjusted (if necessary) to fall within a specified range. Only the segment rates that fall outside of the range are adjusted – the others are unchanged under MAP-21.

Back 97

True

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Determination of MAP-21 adjusted segment rates (Revenue Notice 2012-61)

The range is based on a segment rate that is determined using

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Note that the valuation date is irrelevant with regard to the prior 9/30 date used. For example, for the 2013 plan year, the 25-year average segment rate is determined as of 9/30/2012, regardless of whether the valuation date is 1/1/2013 or 12/31/2013. Similarly, for a plan year that begins on 11/1/2013 and ends on 10/31/2014, the 25-year average segment rate is determined as of 9/30/2012 (because 2012 is the calendar year preceding the 11/1/2013 first day of the plan year).

*

Front 99

Determination of MAP-21 adjusted segment rates (Revenue Notice 2012-61)

The size of the ranges is phased in

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For plan years beginning in 2012, the MAP-21 adjusted segment rate must be no less than 90% and no more than 110% of the 25-year average segment rate.

For plan years beginning in 2013, the range is no less than 85% and no more than 115% of the 25-year average segment rate.

For plan years beginning in 2014, the range is no less than 80% and no more than 120% of the 25-year average segment rate.

For plan years beginning in 2015, the range is no less than 75% and no more than 125% of the 25-year average segment rate.

For plan years beginning after 2015, the range is no less than 70% and no more than 130% of the 25-year average segment rate.

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Purposes for which MAP-21 segment rates are used (and not used)

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MAP-21 segment rates generally are not used in years for which the full yield curve is elected.

The MAP-21 segment rates generally must be used for plan years beginning in 2012 and later.

The MAP-21 rates are used for: 1) IRC section 430 funding 2) Applying benefit restrictions under IRC section 436 (including the determination of the AFTAP)

The MAP-21 rates are not used for: 1)Determining deductible limits under IRC section 404(o) 2) Calculating the minimum lump sum distribution under IRC section 417(e)(3)

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Mortality tables

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A required mortality table is to be prescribed by the IRS.

The 2008 IRS static mortality table is provided in Treasury regulation 1.430(h)(3)-1(e) and is to be updated each year. Revenue Notice 2008- 85 provides the static mortality tables to be used for years 2009 through 2013. Revenue Notice 2013-49 provides static mortality tables for the years 2014 and 2015. (Note that a unisex version of the static mortality tables is used to determine present values under IRC section 417(e)(3).) The static tables take future mortality improvement into account since they are updated each year.

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Mortality tables (Continued)

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A generational mortality table is provided in Treasury regulation 1.430(h)(3)-1(d). The generational table includes factors to reflect future mortality improvement.

The tables provide mortality for annuitants and non-annuitants. 1) The non-annuitant table is used for years prior to the annuity beginning date. Note that plans using no pre-retirement mortality funding assumption would not use the non-annuitant table. 2) The annuitant table is used for those participants in pay status, and for the years during which the annuity is expected to be paid for participants who have not yet begun to receive their annuities. 3) Plans with fewer than 500 participants (active and inactive) are allowed to use a combined static table applying the same mortality to

annuitants and non-annuitants.

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Mortality tables (Continued)

A plan may use a different mortality table upon IRS approval.

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The plan must be in existence for a sufficient period of time in order to have enough experience to demonstrate the validity of the alternate mortality table.

There must be a sufficient number of plan participants.

The mortality table must reflect the experience of all pension plans maintained by the employer (including the entire controlled group).

All plans within the same controlled group must use the alternate table.

The alternate table may not be used for more than 10 years without applying for approval for an extension.

The request for approval must be submitted to the IRS at least 7 months before the plan year for which it will first be used.

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Mortality tables (Continued)

A separate mortality table may be used for disabled lives.

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A different table is to be used for those who became disabled before 1995.

The IRS prescribed mortality table for disabled lives will be revised at least once every 10 years.

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Mortality tables (Continued)

A preretirement mortality assumption must generally be used. However,

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for plans with fewer than 100 participants and beneficiaries not in pay status, an assumption of no preretirement mortality can be used if reasonable (Treasury Regulation 1.430(d)-1(f)(2)).

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Optional forms of benefit

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The probability of electing any optional form of benefit in the plan must

be taken into account.

Any difference in present value due to different assumptions used to

determine the optional forms of benefit must be taken into account.

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Changes in actuarial assumptions

The IRS must generally approve all changes in actuarial assumptions used to determine the funding target if

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all of the following apply:

The plan is covered by the PBGC.

The unfunded vested benefits (as determined for purposes of PBGC premium calculations) are in excess of $50,000,000 for all defined benefit plans of the employer combined (for the entire controlled group, ignoring plans with no unfunded vested benefits), determined as of the close of the prior plan year.

The change in assumptions results in one of the following events:

A decrease in the funding shortfall of more than $50,000,000 for the current year

A decrease in the funding shortfall of more than $5,000,000 for the current year and that is at least 5% of the funding target before the assumption change for the current year

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At-risk plans (IRC section 430(i))

A plan is at-risk if

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all of the following conditions are satisfied.
The funding target attainment percentage (FTAP) for the prior year is less than 80%. If the determination is for the year:
-2008 is less than 65%
-2009 is less than 70% -2010 is less than 75%. *The at-risk FTAP is less than 70%. *the plan had more than 500 participants on at least one day of the plan year (count must include all non-multiemployer db plans in control group)

Hint 108

/

Front 109

The prior year FTAP and at-risk FTAP are assumed to be __________%___ for new plans

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100%

As a result, new plans are not at-risk in the first year, but may be at-risk in the second year.

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There is a general exam condition that states that the plan is not and has never been at-risk, unless you are told otherwise or given information to be able to determine the prior year at-risk status.

Back 110

TRUE

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Funding target for at-risk plans

The funding target is generally equal to the sum of:

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The present value of the beginning of year accrued benefit using additional actuarial assumptions.

A loading factor (only for plans that have been at-risk for at least 2 of the past 4 years), equal to the sum of:
- $700 times the number of participants (active participants, inactive participants, and beneficiaries) in the plan.

- 4% of the funding target determined for the plan if it was not at-risk.

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Target normal cost for at-risk plans

The target normal cost is equal to the sum of:

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The difference between the present value of the end of year accrued benefit and the present value of the beginning of year accrued benefit using additional actuarial assumptions (and increased by the expected plan-related expenses for the year, and reduced by the expected mandatory employee contributions for the year).

A loading factor for plans that have been at-risk for at least 2 of the past 4 years, equal to 4% of the target normal cost determined for the plan if it was not at-risk (and before addition of the expenses and subtraction of the mandatory employee contributions).

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AT-RISK - Additional actuarial assumptions

For all participants who could retire and receive fully vested benefits within the next

Back 113

11 years (including the current year), it must be assumed that they retire on the earliest possible retirement date (but not before the end of the current year). For this purpose, the earliest retirement date is the earliest date on which the participant could terminate employment fully vested, and can begin to receive a benefit. The benefit determined under this assumption is the optional benefit providing the largest present value. Note that this includes plans that provide immediate benefit payments upon termination of employment – no actual early retirement provision in the plan is necessary for this to apply.

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AT-RISK - Additional actuarial assumptions

All participants are assumed to elect

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the most valuable benefit. Note that the exam general conditions state that unless you are told otherwise, all pensions are payable at normal retirement age, so the vested benefits of terminated participants are generally not payable until retirement.

Front 115

AT-RISK - Additional actuarial assumptions

Can ignore additional actuarial assumptions for determination of at-risk status for certain plans of

Back 115

specified automobile manufacturers.

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Note with regard to changing actuarial assumptions for plans no longer at-risk:

If the plan has been at-risk for fewer than the previous 5 consecutive years and is currently not at-risk, then

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automatic approval is given to change the actuarial assumptions so that the additional actuarial assumptions can be removed. All other assumptions are subject to IRS approval with regard to changes in assumptions.

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At-risk - Minimum amounts

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The plan’s at-risk funding target cannot be less than the plan’s not-at-risk

funding target.

The plan’s at-risk target normal cost cannot be less than the plan’s not-at-

risk target normal cost.

Front 118

Phase-in rules

If plan has been at-risk for fewer than 5 consecutive years (years prior to 2008 are deemed not to be at-risk years), then

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the at-risk funding target and target normal cost are phased in at 20% per year. Note that if a plan becomes not at-risk, a new 5 consecutive year period begins when the plan is next at-risk. So, for example, if a plan is at-risk in 2009 and 2010, then becomes not at-risk in 2011, and is again at-risk in 2012, there is a 20% (not 60%) phase-in for 2012.

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Phase-in rules

The phase-in is such that the funding target (and target normal cost) for the at-risk plan is equal to

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the funding target (target normal cost) without regard to the at-risk rules, plus 20% times the number of consecutive years that the plan has been at-risk times the excess of the at-risk funding target (target normal cost) over the funding target (target normal cost) without regard to the at-risk rules.

Front 120

Phase-in rules

Note that the general conditions for the exam state that the terms “at-risk funding target” and “at-risk target normal cost” do not reflect the phase- in.

Back 120

It appears that the purpose of this general condition is to give the exam writers a way to test knowledge of the phase-in. As a result, references to “at-risk funding target” and “at-risk target normal cost” imply calculation before the phase-in. In those cases, the phase-in would need to be applied to determine the “funding target (if plan is at-risk)” and the “target normal cost (if plan is at-risk).” If the funding target or target normal cost is stated as being for purposes of IRC section 430 or for purposes of IRC section 404 (or if a reference is made such as “funding target (if plan is at-risk)” and “target normal cost (if plan is at- risk)”), then I believe that it can be assumed that the phase-in has been applied, based upon previous exam questions. Hopefully it would be clear on an exam question whether or not the phase-in is included. In a question on the 2008 exam, this was not clear, and credit was given for two answer choices (with or without the phase-in included).

Front 121

Minimum funding due date and contributions (IRC section 430(j)(1) and IRS proposed regulation 1.430(j)-1(b))

Contributions for a plan year can be made no earlier than

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the first day of the plan year.

Front 122

Minimum funding due date and contributions (IRC section 430(j)(1) and IRS proposed regulation 1.430(j)-1(b))

The due date for minimum required contributions is

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81⁄2 months after the end of the plan year.

Front 123

Minimum funding due date and contributions (IRC section 430(j)(1) and IRS proposed regulation 1.430(j)-1(b))

Contributions made after the valuation date must be

Back 123

discounted with interest from the date paid to the valuation date (even if after the plan year but within the 81⁄2 month minimum funding period).

Front 124

Minimum funding due date and contributions (IRC section 430(j)(1) and IRS proposed regulation 1.430(j)-1(b))

Contributions made before the valuation date must be

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increased with interest from the date paid to the valuation date.

Front 125

Minimum funding due date and contributions (IRC section 430(j)(1) and IRS proposed regulation 1.430(j)-1(b))

Interest adjustment for the minimum required contribution is based upon

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the effective rate of interest that is equivalent to the segmented interest rates used to determine the funding target.

Front 126

Failure to satisfy the minimum funding requirement (IRC section 430(k))

A plan that fails to make a minimum required contribution (including timely quarterly contributions) is subject to additional requirements if

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both of the following applies:

The total unpaid balance (including interest) exceeds $1,000,000.

The funding target attainment percentage for the plan year is less than 100%.

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Failure to satisfy the minimum funding requirement (IRC section 430(k))

Additional requirements.

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There is a lien placed on the employer (including all employers in the controlled group) equal to the unpaid balance. The lien continues until the last day of the first plan year in which the plan has repaid the unpaid balance, or the unpaid balance is no longer larger than $1,000,000.

The PBGC must be notified of the failure to make the required contribution within 10 days of the contribution due date.

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Excise tax upon failure to satisfy minimum funding requirement (IRC section 4971 and IRS proposed regulation 54.4971(c)-1)

There is a ____% excise tax upon failure to meet minimum funding under IRC

section 4971,

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10%

payable by the employer (all employers in the controlled group are deemed to be the employer). In addition, a 100% excise tax may apply if the minimum funding requirement is still not paid as of the close of the tax year in which the 10% excise tax was imposed. Note that the 100% excise tax is not automatic – the IRS must inform the employer of the possible imposition of the excise tax if the required contribution is not made within a reasonable deadline.

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Excise Tax (Continued)

Back 129

The excise tax is applied to the unpaid contribution determined as of the

valuation date (the accumulated funding deficiency). This is the difference between the minimum required contribution (reduced by any funding standard carryover balance and/or prefunding balance that is elected to be applied by the plan sponsor) and the interest-adjusted contributions (including additional interest required due to late quarterly contributions). (See IRS proposed regulation 54.4971(c)-1.)

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Excise Tax (Continued)

Back 130

The excise tax is applied to the unpaid contribution determined as of the

valuation date (the accumulated funding deficiency). This is the difference between the minimum required contribution (reduced by any funding standard carryover balance and/or prefunding balance that is elected to be applied by the plan sponsor) and the interest-adjusted contributions (including additional interest required due to late quarterly contributions). (See IRS proposed regulation 54.4971(c)-1.)

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Excise Tax (Continued)

Back 131

Contributions paid in any plan year must first be applied to correct any unpaid minimum required contributions for any prior plan years. The portion of the contribution applied to the prior plan year must be discounted to the prior year valuation date using the plan’s effective interest rate that applied to that prior valuation year.

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Excise Tax (Continued)

Back 132

Contributions applied to repay an accumulated funding deficiency in existence as of the end of the 2007 year must be discounted using the 2007 valuation interest rate.