2009 Pension Funding Regulations

1. The New Pension Funding
Regulations:
They’re Not All They Appear to Be
November 4, 2009
Jim Van Iwaarden
Consulting Actuary
Van Iwaarden Associates
Minneapolis, Minnesota

2. Jim Van Iwaarden
Consulting Actuary
Van Iwaarden Associates
Minneapolis, Minnesota
Mr. Van Iwaarden is a consulting actuary known for innovative retirement plan design, and a
frequent speaker on retirement issues. He has over 30 years’ experience in employee
benefit consulting, with his own firm since 1991 and national firms before that.
Mr. Van Iwaarden is a Fellow of the Society of Actuaries, an Enrolled Actuary, a Fellow of
the Conference of Consulting Actuaries, and former ‘ERISA Jeopardy’ champion. He holds
a BS in math, with highest honors, from the University of California.

3. Topics
 PPA refresher: funding and benefit restrictions
 Differences between proposed and final regs
 Surprising provisions
 Funding strategies
 Credit balance management

4. Poll #1
I am:
A. A plan sponsor, serving my employer’s plans
B. A practitioner, serving many plans
C. A casual observer

5. PPA Refresher:
The New Language
Old Name New Name Differences
Credit Balance
Carryover Balance (COB),
Prefunding Balance (PFB)
(still call them “credit
balances” together)
Many!
Use, generation, roll
forward, waivers
Current Liability (CL) Funding Target
Based on
3-segment smoothed
or full “spot rate”
yield curve
Funded CL Percentage
Funding Target Attainment
Percentage (FTAP),
Adjusted (AFTAP)
Credit balances
usually deducted
from assets
Unfunded CL Shortfall Based on
funding target

6. PPA Refresher:
New Minimum Contribution
 Minimum required contribution (MRC) is:
target normal cost
PLUS shortfall amortization (7 years)
MINUS credit balance (sometimes)

7. PPA Refresher:
Funding Goals
 Most phased in 2008 – 2011
 Consequences for not reaching goals
 Some WRERA relief

8. PPA Refresher:
Funding Goals
AFTAP Consequences of
Underfunding WRERA Relief
60% in 2008
“Hard” benefit restrictions:
No benefit accruals
No lump sums
No shutdown benefits
Can “smooth” (rather than
average) assets over two years
Small cashouts (under $5000)
exempt from restrictions
Use max (2008, 2009) AFTAP
for freeze threshold
65% in
2008 to
80% in
2011
At-Risk status for plans with
>500 participants:
Higher funding target
Nonqualified funding
restrictions for top 5
No relief

9. PPA Refresher:
Funding Goals (continued)
Goal /
Consequences of
Phase-In
Underfunding WRERA Relief
80%
Can’t use credit balance to
reduce next year’s contributions
“Soft” benefit restrictions:
No benefit increase amendments
Lump sums limited to smaller of:
PBGC guaranteed benefit, and
50% of accrued benefit
Asset smoothing
Small cashouts exempt
92% in 2008
to 100%
in 2011
No phase-in if 2007 old-law
“deficit reduction contribution”
No phase-in if shortfall
amortization charge
Amortization
based on phase-in,
not 100%
100% Quarterly contributions next year No relief

10. PPA Refresher:
Valuation Deadlines
 Until the actuary certifies the AFTAP, it’s
assumed to be:
– the same as last year, for the 1st 3 months
– 10 percentage points lower, after that
– under 60% (at-risk, “hard” benefit restrictions)
if not certified after 9 months
 Can issue a temporary “range” certification

11. Differences:
Final Regs vs. Proposed
 Automatic approval to change asset
method and yield curve until 2010
 “Range” AFTAP certification extends
deadline to EOY for final AFTAP cert

12. Differences:
Final Regs vs. Proposed
 “Standing” election to apply credit
balances toward minimum contributions,
and/or to generate prefunding balances
 Can revoke unneeded election to apply
credit balance, by EOY

13. Differences:
Final Regs vs. Proposed
 New definition of collectively bargained plan:
 25% of all participants are union, or
 50% of benefiting actives are union
 The second part is new
 Delayed §436 effective date for coll barg plans
 Benefit restrictions won’t apply until 2010

14. Poll #2
I believe plan amendments adopted after the valuation
date can be recognized:
A. Always
B. Most of the time
C. Only in cases of substantial business hardship
D. Never

15. Surprising Provisions
 Can you recognize plan amendments
adopted after valuation date?
 In proposed regs, the answer appeared to
be only for substantial business hardship
 In final regs, it’s clearer
 But you must broaden your reading of the
Internal Revenue Code

16. Surprising Provisions (cont’d)
 Can you recognize plan amendments adopted
after valuation date?
 Yes, with §412(d)(2) election
 But for §412(d)(2) you must:
 ignore the part about amendments after EOY, and
 ignore the part about reducing accrued benefits, and
 check the box on form 5500, schedule R

17. Surprising Provisions (cont’d)
 Confiscated credit balances
 Presumed AFTAP at BOY = same as last year
 Suppose last year’s AFTAP is just under 80%:
“deemed election” waives some of balance if
there’s enough to avoid benefit restrictions
 Deemed election is irrevocable, even if actual
AFTAP comes up over 80% without waiving
 IRS ignored comments on similar provisions in
proposed regs

18. Funding Strategies
 Want to avoid hassles & restrictions
 <60%: hard restrictions, at-risk for larger plans
 <80%: soft benefit restrictions
 <100%: quarterly contributions, shortfall amort
 Cherry-pick interest rates & asset method for
2008 and 2009
 PPA maximum deductions are HUGE
 Contribute to avoid restrictions, when feasible
 Manage credit balances to avoid hassles

19. Credit Balance Management
 When to keep COB’s & PFB’s
 When to get rid of them
 When to not even generate them

20. Credit Balance Mgmt (cont’d)
 Watch out! Several versions of FTAP:
 For AFTAP cert, deduct PFB & COB if assets<FT
 For quarterly trigger: always deduct PFB & COB
 For shortfall exemption & CB use: deduct only PFB
 Can have quarterlies even if LY AFTAP>100%
 COB’s are slightly better than PFB’s

21. Credit Balance Mgmt (cont’d)
 Want to keep credit balances when:
 assets – (PFB + COB) > funding target
 Why?
 no required quarterlies next year when funded
status (on this basis) is 100% or more
 can use credit balances to offset minimum contr
 What to do?
 waive enough COB & PFB to reach 100% on this
basis

22. Credit Balance Mgmt (cont’d)
 Want to (or have to) get rid of balances when:
 assets – (PFB + COB) < 60, 80 or 100% of FT
 Why?
 <60%: hard benefit restrictions, at-risk status
 <80%: soft benefit restrictions, can’t offset min contr
 <100%: quarterly contributions next year
 What to do?
 mandatory waiver to avoid benefit restrictions
 waive enough to reach 100% funding

23. Credit Balance Mgmt (cont’d)
 Don’t generate new prefunding balances when
you’re waiving to reach 60, 80 or 100%
 Why?
 COB’s are slightly better than PFB’s
 carryover balances must be waived before PFB’s
 generating new PFB’s forces waiver of more COB’s
 What to do?
 don’t elect to generate new PFB’s, or
 revoke standing PFB election, if you’ve made one

24. What We’ve Covered
 PPA refresher: funding and benefit restrictions
 Differences between proposed and final regs
 Surprising provisions
 Funding strategies
 Credit balance management

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