§430 - Single Employer Funding Flashcards
Section 412 says that plans need to pay out MRC for single employers. Which of the following are exempt from 412?
Profit Sharing
Money Purchase Plan
Stock Bonus Plan
Profit Sharing and Stock Bonus Plans
How are assets transfered under section 420 treated for purposes of the funding (section 430)?
Not treated as part of the assets.
What is the accumulated funding deficiency?
excess of the MRC over the PV of the contributions made for that year. (PV is as of val date)
When is the accumulated funding deficiency as of for single employer plans? Multiemployer plans?
- the valuation date for single employer
- the last day of the plan year for multiemployer plans
What is the excise tax on the accumulated funding deficiency?
10% tax on the sum of the AFD
If averaging FVA for the AVA, what is the earliest and latest FVA you may use at valuation date of 1/1/2020?
Earliest is 12/31/2017
Latest is 1/1/2020
How would you adjust the 1/1/2017 assets to 1/1/2018 to use in a 2-year average value of assets?
Sum
- 1/1/2017 assets with PV of Receivable Contributions
- -Benefit Payments
- -Admin Expenses
- Contributions
- Expected Returns (using items 1-4)
The AVA must be within X% and Y% of the MVA. What is X% and Y%?
90% and 110%
What is the EROA limited to? Reflecting MAP-21?
If using segment rates then the third segment rate
If using full yield curve then the the 24 month average of the third segment rate ending on the month before the valuation month
It does reflect MAP-21
If a receivable contribution is contributed before the valuation date is the MVA adjusted?
No - the contribution will already be in the MVA, so no adjustment needed.
If the valuation date is 1/1/2020 and there is a contribution for 2019 on 7/1/2020, how would the Assets be adjusted for this contribution?
Take the present value of the receivable contribution with the 2019 EIR and add the PV to the assets.
When determining the AVA from averaging the FVA, what are the averaging rules?
- Time between values being averaged must be equal
- Can’t have more than 12 months between the values being averaged
- Can’t use values prior to last day of the prior 25th month
If the valuation date is 12/31/2020 and there is a contribution for 2020 on 7/1/2020, how would the Assets be adjusted for this contribution?
Increase the contribution by the current year’s EIR to 12/31 and subtract out the contribution + interest from the asset value.
When is approval needed for an assumption change in the funding target?
- UVB in controlled group >= 50M
- End of prior year on 4006 basis, ignore plans with no UVB
- AND assumption reduces Funding Shortfall by more than 50M or more than 5M and 5% of Funding Target
What are the at-risk assumptions?
(excluding the load if 2 of last 4 years are at-risk)
- Participants eligible to retire within 11 years of val date will retire at the earliest date they can immediately receive a fully vested balance
- This wouldn’t be before the end of this year (unless ret decrements have them already leaving)
- All participants take FOP with highest present value
This would exclude someone that retires exactly 11 years later (i.e. on val date 11 years later)
When is a plan exempt from the at-risk provisions?
Plan has 500 or less participant on each day of PRIOR plan year.
Count agggregates all non-multiemployer DB plans and only counts participants of employer.
When is there a loading factor for at-risk plans?
What is the at risk loading factor for funding target?
- Loading factor applies if plan has been at risk in 2 of the past 4 years
- The loading factor is 4% of the not at-risk funding target + $700 per participant
When is there a loading factor for at-risk plans?
What is the at risk loading factor for target normal cost?
- Loading factor applies if plan has been at risk in 2 of the past 4 years
- The loading factor is 4% of the not at-risk TNC (excluding plan expense)
When is a plan in “at-risk” status?
- prior year’s FTAP < 80% and
- prior year’s FTAP with funding target reflecting at-risk assumptions but no load < 70%
Once you calculate the at-risk and not at-risk FT/TNC, how does the phase in rules apply?
20% * times the number of consecutive years the plan has been at risk * at-risk FT + opposite weighting * normal FT
T/F It is allowable for the at-risk FT/TNC to be less than the normal FT/TNC.
False, if less than, then set the at-risk value to the normal value.
If a plan sponsor elects to reduce the credit balance on valuation date, does the funding calculations reflect this reduction? I.e. would the SAI installment include the old or new PFB value?
Calculations reflect the reduced value.
When are calculations to increase/decrease the credit balances defined?
Only as of the first day of the year, not the valuation date
What are the 3 things a plan sponsor can elect with regards to credit balance?
- Elect to increase PFB by excess contributions and maintain the FSCB
- Elect to apply CB to the MRC
- Elect to reduce the CB
What is the last day to make credit balance elections?
8.5 months after the end of the year
When are standing elections deemed to occur?
September 15th (last possible day)
What is the interaction between elections of the credit balance? I.e. what is the order of how elections take place?
Elections are applied based on the chronological order, but note
- Voluntary elections occur on the first day of the year
- Must then discount back to prior year (prior asset return) to determine prior year’s credit balance.
Does it matter if you use FSCB or PFB first?
Yes must use FSCB before you use PFB.
When could a plan sponsor revoke their credit balance elections?
If they elected to offset more than minimum contribution. I.e. they elected to use $10M to offset minimum but the minimum was $9M then they could revoke $1M.
What are the 2 reasons a standing election would no longer be in effect?
- Plan Sponsor revokes election
- Enrolled actuary who signs SB is not the one named in the standing election
Is there anyway to avoid making a written election regarding credit balance each year to the enrolled actuary?
Yes you can make a standing election to use credit balance to offset MRC and add maximum amount to the PFB.
Effective Interest Rate Definition
What if the funding target is $0?
Single interest rate that reproduces the non-at-risk funding target
If funding target is $0, then use the target normal cost
What are the excess contributions that could be added to the MRC?
Take the PV of contributions as of the valuation date (using the EIR) and subtract the MRC.
What is the Funding Standard Carryover Balance? How is it rolled forward? Can it be increased by excess contributions?
It is the amount of credit balance pre-PPA that was “rolled over”
It is rolled forward by the return on the plan assets.
It is not increased by excess contributions.
Under the full yield curve election, how does HAFTA modified the rates?
It doesn’t, there is no stabilization for the yield curve method.
Under the full yield curve method, how do you switch back to using segment rates?
You need Secretary approval
What is the funding shortfall amount? Any restrictions on values?
The funding shortfall is:
FT (including at-risk is applicable) - AVA + PFB + FSCB
Value cannot be negative
When calculating the not at-risk Funding Target/TNC, you must take the present value of the accrued benefits and benefits expected to be accrued over the year respectively. When is the Present Value as of?
First day of the plan year
Which amendments are included in the funding target for section 430?
Amendments adopted by the valuation date and effective before the end of the year.
Under 412(d) election a plan amendment within 2.5 months after end of plan year is treated as adopted on 1st of the plan year (if the amendment can take effect before the end of the plan year - 436)
For a cash balance plan what is the funding target?
- Project the current acount to NRA with interest crediting rate
- Take the present value of the project account balance using segement rates
For a flat benefit that is not based on service, how do we calculate the funding target?
- Calculate the full present value of the benefit
- Multiply by years of service at the beginning of the plan year
- Divide by the expected years of service at the time at the event when the benefit becomes payable
Does the 430 FT exclude salary scale before early retirement?
430 Funding Target excludes all salary scale
When does the PBGC get a lien against the employer?
- unpaid quarterlies/liquidity shortfalls exceeds $1 million AND
- FTAP < 100%
The plan sponsor must notify the PBGC within X days of missing a quarterly payment if over $1M and the FTAP < 100%. What is X?
10 days
What are liquid securities?
- Cash
- Marketable Securities (Securities that can be moved to cash quickly)
- Insurance Contracts that can be quickly exchanged for cash.
What is the liquidity shortfall amount? (Assume no special events)
- Base Amount - Liquid Assets at close of quarter
- Base Amount is 3 * Adjusted BPs
- Adjusted BPs is the sum of the last 12 months of
- Annuities, Lump Sums, Benefit Payments and Admin Expenses
- Minus FTAP from year of payment * (One Time Payments + Annuity Payments)
Which plans are subject to Quarterly Contribution requirements?
Single employer plans with a funding shortfall in the prior year
FS = FT – (AAV – CB – PB)
What is the penalty for a late payment of the liquidity requirement?
What is the excise tax?
- Similar to a late quarterly
- discount contribution at EIR + 5%
- BUT the period of underpayment is always 2.5 months (i.e. until next quarter)
- 10% Excise Tax. 100% if there is liquidity shortfalls for the next 4 quarters.
Scenario: the Liquidity Shortfall is $70 and the required quarterly installment is $60 and the payment is late. Which portion of the contributions would be subject to the late liquidity payment?
$10
i.e. $70 - $60
What is the cap on the requirement for contributions due to a liquidity shortfall?
Amount that, when added to prior amounts paid for the year, would increase FTAP to 100%
When determining the liquidity shortfall, when would you redetermine the base amount without a one-time event?
If base amount exceeds 2*Adjusted Disbursements over prior 36 months and the actuary certifies it was due to non-recurring circumstances, the plan can redetermine the base without the event’s effects.
T/F Credit Balance can be used towards a liquidity shortfall.
False
T/F money paid in for the MRC on the due date (or up to 15 days before) can also be used for liquiditidy shortfall.
True
How do contributions made before the end of the quarter affect the liquidity shortfall?
They would be included in the liquid assets so would lower liquidity shortfall indirectly, but not used to offset the liquidity shortfall amount.
If a plan has to make a liquidity contribution, when is that contribution due by?
15 days after the close of the quarter (i.e. the same days as the minimum)
T/F You only need “credible mortality experience” for either annuitants or non-annuitants?
TRUE
If you are lacking credible mortality experience for one gender, could you use a plan specific table for one gender and a standard table for the other gender?
Yes
For funding, when may a plan assume no pre-retirement decrements?
Less than 100 participants not in pay status (but assumptions still needs to be reasonable)
T/F for funding a plan may not use static mortality.
False
To use plan-specific tables for mortality, what is the “credible mortality experience” that the plan needs?
1000 deaths within a 4 year period
For funding, when can a plan use a “combined” table (no seperate mortality for annuitants and non-annuitants)
- Using static mortality table
- Have less than 500 participants
How do plan specific tables work within a controlled group?
All plans in the controlled group must use plan-specific mortality tables unless the plan can demonstrate a lack of credible mortality experience.
What is the formula for the MRC? What is the smallest possible value for MRC?
- If (AVA - FSCB - PFB) >= FT, MRC is NC - (AVA - FSCB - PFB - FT)
- Else, sum of NC, Shortfall Amort Charge, and Waiver Amort Charge
Under both MRC must be >= 0
When is a plan exempt from paying quarterlies?
If no funding shortfall in the prior year (i.e. FT <= AVA - FSCB - PFB)
If an accumulated funding deficiency occurs, how are contributions for the current year handled?
We roll forward the accumulated funding deficiency at the EIR for the year the AFD occured and the plan sponsor’s contribution must first be used towards the AFD, then the current year’s MRC.
When would the funded percentage restrict an employer from using credit balance towards the MRC?
If the prior year’s:
(AVA-PFB)/(not at risk FT) < 80%
When is the MRC calculated as of? How is it adjusted if you pay it later than this date?
- Calculated as of valuation date
- Increased with EIR if paid later
What is the Prefunding Balance? How is it rolled forward? Can it be increased by excess contributions?
It started as $0 at the beginning of PPA and is increased by excess contributions if so elected by plan sponsors
It is rolled forward by the return on the plan assets.
How is the PFB rollforward if the MRC is offset by CB, but the contributions are in excess of the MRC?
- PFB at the beginning of year (excluding portion used) is rolled forward at asset returns
- PFB that is created from excess contributions only because the plan sponsor offset MRC with PFB is rolled forward at asset returns
- Remaining is accumulated at EIR
How is the PFB rolled forward to the valuation date if the valuation date is the not the first of the year?
At the EIR
T/F PFB is only available to be used once the contribution is contributed and elected to be added to the PFB
TRUE
What is the amount of each of the 4 quarterlies?
- 25% * Lesser of
- 90% of Current Year MRC
- 100% of Prior Year MRC
T/F Payments that are made earlier than the due date can be increased with interest.
True
If you a paying a quarterly late, do you need to pay more for this quarterly?
No, but do increase the discounting factor so the residual would increase.
How is the employer penalized if they contribute the quarterly amount after the due date?
When discounting the quarterly back to the val date, they use EIR + 5% instead of EIR during the late period.
How is the plan sponsor penalized for electing to use PFB for the quarterlies after the due date?
They would discount back to the val date using the late payment rate (EIR + 5%) for the late payment period when determining the contribution paid, but discount back using the EIR only when determing the funding balance used.
In a short plan year, what is the required annual amount that would be used to determine quarterlies?
It is the lesser of
- 90% of current year MRC
- 100% of prior year MRC scaled up/down using # of months / 12
In a short plan year, how many quarterlies are due?
Equal amounts paid at:
- 3.5 months after start of plan year (if applicable)
- 6.5 months after start of plan year (if applicable)
- 9.5 months after start of plan year (if applicable)
- Always one 15 days after plan year
If a plan sponsor has a standing election to use credit balance on quarterlies, what is the amount it pays?
Can the amount be modified?
- Pays the prior year’s MRC amount
- Can be modified to be the the actual quarterly for remaining payments when the current val is done.
When are the quarterlies due?
- 3.5 Months after 1st day (April 15th)
- 6.5 Months after 1st day (July 15th)
- 9.5 Months after 1st day (October 15th)
- 12.5 Months after 1st day (Following Jan 15th)
What is a retroactive amendment?
- Amendment adopted within 2.5 months (single employer) or 2 years (multiemployer) after plan year ends
- Cannot decrease ptp accrued benefit as of start of plan year and date of adoption
- You would need approval from the secretart to redicue the benefit
When can you wipe all bases for the SAI?
if AVA - FSCB - PFB > FT
When is no new SAI base required for the year?
If PFB is used towards the MRC, then when AVA - PFB > FT
Else when AVA > FT
How is an SAI calculated?
Calculate FT - AVA - CB - prior SAI charges - Waiver amort Charges
This is amortized at the segment rates over 7 years
What is the Shortfall Amortization Charge?
What is the minimum value on the SAI and SAC?
SAC = SAI for current year + last 6 years of SAI
No limit on SAI, SAC must be greater than 0
Is the not-at risk or at-risk funding target used to determine the shortfall amortization amount?
The ongoing funding target so it would include the at-risk funding target if applicable
If an SAI base is calculated in the first year, does it change in the second year when the segment rates change?
The actual amount doesn’t change, but the PV does.
For a short plan year (8 months), how is the SAI for the MRC affected?
How is the outstanding amount affected?
Are waivers handled the same?
- You multiply the installment by (8/12)
- For the outstanding amount, you multiply the outstanding amount by (6 year amort factor + 4/12 * segment 2^-6)
- Yes
There are three segment rates, what are the years that each segment rate is used to discount back? Are the 430 segment rates averaged?
Segment 1 - First 5 Year
Segment 2 - Years 6 to 20
Segment 3 - Over 20 Years away
Yes - 24 month average
For a calander year plan, what months are allowable for the choosing the applicable interest rate?
Sept, Oct, Nov, Dec, Jan
I.e. January or previous 4 months.
Under BB2015, HAFTA and MAP-21, interest rates are limited to a corridor around what?
What is the corridor %?
- 25 year average of segment rates
- 2020 - 10% to 2024 - 30% by 5%
Unless given additional info, what is the applicable month for the segment rates? (i.e. default month)
January
Is Map-21 used for:
- 430 Funding
- Deductible Limits under 404(o)
- Calculating Min. LS under 417(e)(3)
- 436 Benefit Restrictions
- Yes
- No
- No
- Yes
- T/F the 417(e) rates and the 430 rates are the same
- T/F You must use the same lookback month for both
False
False
Which items can you get automatic approval for?
- “Switch to yield curve” or “Switch to segment rates”
- Switching from Month X to any other month under the segment rates.
- “Switch to yield curve” (i.e. segment rates are default so you have an opportunity to switch away for free)
- X = January (Jan is default)
How is the target normal cost adjusted for plan expenses and mandatory employee contributions?
- If plan expenses are paid out of plan assets then they are added to the TNC
- The TNC is reduced by expected mandatory employee contributions
What is the load on the Target Normal Cost for an at-risk plan? When does the load apply?
Load: 4% of the not-at risk TNC (before reducing by EEC and adding admin expenses)
Applies: if the plan has been at-risk in 2 of the last 4 years
For a cash balance plan what is the target normal cost?
It is the present value of the current year’s pay credit rolled forward to the normal retirment age with interest credit.
If the benefit is not based on service, how do we calculate the target normal cost?
- Based on increase in “Proportionate Benefit” due to service accrued
- i.e. 1 divided by the expected years of service at the time at the event when the benefit becomes payable
How is salary scale incorporated for the target normal cost?
The accrued benefit at the beginning of the year doesn’t included any future salary increases and the accrued benefit at the end of the year includes 1. Hence salary scale is incorported into the TNC
If a plan has more than 100 participants, when is the valuation date under section 430?
First day of the plan year
Why would the valuation date (section 430) not be as of the first of the year? What day is it as of?
If there are 100 or less PARTICIPANTS on each day of prior plan year you can use any day of the plan year for the valuation date.
PARTICIPANT count aggregates all non-multiemployer DB plans in controlled group that are participants of employer
What is the advanced notice that is required when apply for a funding waiver. who does it need to be sent to?
- Prior to submitting for a funding waiver approval, you need to let affected parties know the extent of funding of liabilities and guaranteed benefits
- Participants/Beneficiaries
- Employee Organizations
- PBGC
While have a funding waiver, what amendments are allowable?
- Secretary Approval + only provide a de minimus amount
- Repeals retroactive amendment
- Required for plan to stay qualified
While a waiver is in affect, the plan cannot adopt a plan amendment increasing liabilities. What happens if it does adopt the amendment?
The funding waiver no longer applies for any year ending after the adoption date.
When can you waive the Waiver Amortization Installment Bases?
When the AVA - FSCB - PFB > FT
How is the waiver amortization installment calculated?
Calculate the amount of the waiver then calculate an annuity due for 5 years at the segment rates (i.e. 5th year uses second rate) and divide the waiver amount by the annuity factor.
What needs to be true for a DB plan to get a funding waiver?
- Temporary Business Hardship
* Employer is operating at economic loss
* Substantial underemployer/unemployment in industry
* Sales of industry are declining/depressed
* Reasonable to expect the plan will only continue if the waiver is granted - Application of the minimum funding rules would be adverse to the participants
If you get a waiver, why would you not be able to waive the full amount of the MRC?
You cannot waive any portion of the MRC that is due to a prior waiver.
T/F a funding waiver only looks at the plan sponsor when determining if a business hardship occurs.
T/F a funding waiver for a multiemployer plan would require all plans to have a business hardship.
False - all employers in the controlled group.
False - 10% of employers participating
What is the maximum number of required contributions that can be waived for a single employer plan? multiemployer plan?
Single: 3 out of consecutive 15
Multi: 5 out of consecutive 15
When would you need to provide security to the IRS against the funding waiver?
If total outstanding amount from all waivers is greater than $1M
When is the application for a waiver due for a single employer plan?
Within 2.5 months after the plan year ends.
