The Consulting Actuary

Sessions 204 & 404 - Late Breaking Developments
Presenters: Kyle N. Brown, Heidi Rackley
Recorder: Michelle Koontz

The panelists highlight hot new issues, regulations, and rulings from the IRS, DOL, and PBGC. They also emphasize the practical application of these new developments and their effect on client consulting assignments.

PPA Technical Corrections

PPA technical corrections, as of April 7, 2008, have not been enacted. But bills passed by both the House and Senate would affect both DB and DC plans. They would clarify combined plan deduction limits that apply for years 2006 and 2007, exempting employers with DC contributions of no more than 6% of pay and overturning IRS Notice 2007-28. The provision will also clarify that tax-free distributions of up to $3,000 a year from governmental plans can be used to pay public safety officers’ health and long-term care premiums in self-insured plans.

A key DB plan provision would provice that lump sums of up to $5,000, regardless of whether they are voluntary or involuntary, are exempt from Code §436(d) accelerated distribution restrictions. Another provision modifies the target normal cost definition, adding expenses expected to be paid from plan assets in plan year and subtracting expected mandatory employee contributions. The bills would also give the IRS the authority to write rules for the 2008 quarterly contribution lookback to 2007 funded status and small plans using valuation dates other than the first day of the plan year. They would also align the 415 mortality table with 417(e)(3) effective for the 2009 limitation year. Other provisions should help clarify hybrid plan rules and multiemployer plan funding rules. The hybrid plan 3-year vesting requirement would apply to participants with an hour of service after the rule takes effect for the plan and the effective date for bargained plans and conversion restrictions would be clarified. With regards to multiemployer plans, a criteria for using the shortfall method and a criteria for mandatory implementation of default funding improvement or rehabilitation plan will be released. Also an excise tax calculation should be provided if rehabilitation plan is not adopted by the deadline. A provision clarifying the 420 transfer rules will also be provided.

Along with DB provisions come DC provisions. One states that Roth 401(k)/403(b) accounts may be rolled over to a Roth IRA, regardless of a participant’s adjusted gross income. Another provision is that initial contributions under auto-enrollment features may be unwound within 90 days, regardless of whether they were invested in Qualified Default Investment Alternative (QDIA); and withdrawn contributions don’t count in Actual Deferral Percentage (ADP) test. Also, fiduciary protections for QDIA’s apply to beneficiaries. Refunds of excess deferrals do not need to include gap period earnings. This would override IRS regulations effective in 2007. This only applies for excess deferrals in 2008 or later. It will also be released that plans may offer “qualified reservist distributions” to military reservists called to active duty on or before 12/31/2007.

There seem to be a couple of issues missing from the PPA Technical Corrections Act. One has to do with the Senate passed asset smoothing provision. It’s not clear and debated that they actually meant “smoothing.” Another issue has to do with the bipartisan bill’s fiduciary relief for blackout periods of up to three days. It is suggested impractical to provide 30 days advance notice of a brief blackout.

Employers’ Accounting for Retirement Plans

The FASB and IASB have been working on an overhaul and convergence of US and international standards governing employers’ accounting for retirement plans. The FASB and IASB have taken a “divide and conquer” approach to resolving high priority problems. The IASB will tackle accounting for cash balance and other plans that do not fit neatly into DB or DC definitions. The FASB will take on disclosures about plan asset risks and multiemployer plan obligations. FASB will also work on income statement presentation. As each board completes a project, the other will decide whether to adopt the same standard.

IASB Discussion Draft on Amendments to IAS 19

The discussion draft was the first milestone of a very long process. It was published March 27 and will be available on the IASB website on April 7. The next milestone will be an exposure draft of proposed IAS 19 amendments. The final draft will be published in 2011 and effective in 2013.

The discussion draft defines two benefit types, contribution-based and defined benefit. Benefits are categorized according to how they are earned and not how they are paid or funded. Contribution-based benefits can be defined as a sum of notation or actual contributions that can be known at year end and notational or actual returns which can be 0%, fixed, asset-based, or index-based. Defined benefit promises are those that cannot be expressed under the contribution-based definition.

The draft also provides different accounting measures for each benefit type. The liability measure for contribution based benefits would be the fair value where DB promises would be valued under current IAS 19 rules. For the income statement recognition of change in funded status during the year, contribution-based changes should be recognized in P&L. The board did not reach a consensus on how defined benefit promises would be recognized. The discussion draft presents three alternatives: showing all changes in P&L, showing the “costs of service” in P&L and everything else in OCI, or showing financial assumption changes in OCI and everything else in P&L.

Proposed FSP 132(R)-a

Published on March 18, FSP 132(R)-a would amend FAS 132 (r) to greatly expand employers’ disclosures about retirement plan assets. This would require plan sponsors to disclose the fair value of each major category, fair value measurement techniques, and concentrations of risk. The disclosure would be effective for fiscal years ending after December 15, 2008. The need for this provision arose because the FASB felt investors need more information about risk and where their investments are allocated. At this point, it’s not clear if the benefits of this proposal would be worth the added costs and how investors will use this added information. Some of the foreseen problem areas involve overlapping categories, measuring significance, and an absence of a significance threshold.

IRS Notice 2008-30

Notice 2008-30 provides guidance on PPA distribution related rules. With regard to 417(e) limits, the continued use of pre-PPA (GATT) assumptions during the transition period is fine. Through the end of the 2009 plan year, if the lump sum determined using GATT assumptions is more valuable than the Qualified Joint Survivor Annuity (QJSA), it does not violate the requirement that the QJSA be at least as valuable as other options under the plan. The Notice also elaborates on Qualified Optional Survivor Annuity (QOSA) requirements in that the QOSA may be more valuable than a single life annuity. Spousal consent is not required to elect the QOSA and the QOSA amendment is not entitled to §411(d)(6) relief.

The Notice also states that Roth IRA rollover elections must be permitted with a 20% mandatory withholding if eligible rollover distribution is paid to participant. This withholding does not apply to direct Roth IRA rollovers. Distributions that are rolled over are not subject to the §72(t) early distribution tax. Recordkeepers will need to know rollover type to report on Form 1099-R since the taxable amount in box 2a varies by rollover type.

PBGC §4010 Financial and Actuarial Information Filings

In February 2008, the PBGC released proposed 4010 regulations implementing PPA changes to require annual reporting gateways. PPA replaced the old-law gateway of total unfunded vested benefits in all controlled group plans exceeding $50 million with a plan by plan test that would require a filing if any plan’s FTAP was less than 80%. The proposed regulations would provide an exemption, however, if the aggregate controlled group underfunding is less than $15 million. Plans eligible for targeted funding relief must determine FTAP and 4010 funding shortfall without regard to relief. The FTAP and 4010 funding shortfall are determined at the valuation date for the plan year ending in the information year. This will accelerate the time when contributions must be made to avoid a 4010 filing by six to 12 months, depending on the plan and information years.

Rev. Rul. 2008-07

This ruling describes the application of accrual rules to use "greater of" formulas, such as when a plan provides participants the greater of traditional versus cash balance formulas. This requires testing on "combined" basis that will be difficult to pass when a plan provides benefits under both a career average formula and any other formula. There is relief from IRS disqualification through the 2008 plan year-end if each formula, standing alone, satisfies accrual rules and if the plan met certain determination letter conditions as of Feb. 19, 2008.

§204(h) Notices

The IRS Newsflash on November 2007 states that the §204(h) is not required when amending traditional DB to substitute PPA §417(e) assumptions for pre-PPA assumption in determining lump sums. The proposed §204(h) regulations clarify the Newsflash relief for traditional DB plans by updating it to any §417(e) distribution option assumptions, not just lump sums. However, there is no relief for traditional plans updating §417(e) assumptions for other purposes and for hybrid plans updating §417(e) assumptions for any purpose.

Other Participant Communication Developments

The DOL Field Assistance Bulletin 2006-03 states that DB annual notice was due by the end of 2007 and the DB triennial notice is due for 2009 plan year. It is required that DB plan benefit statements are given every three years or annually give notice that statements are available. Electronic availability is sufficient if participants are notified of how to access information. For DC plans without participant directed accounts, there is good faith compliance to provide statements on or before filling Form 5500 for the 2007 plan year.

The IRS gave Notice 2007-7 stating that the PPA Right to Defer (RTD) notice may be given as much as 180 days before annuity start date. The RTD notice is required if distribution is subject to participant consent, but not for distributions less than $5,000 or if the participant has attained the later of age 62 or Normal Retirement Date (NRD).

Plan Termination/Partial Termination

Revenue Ruling 2007-43 states that partial termination is presumed to have occurred if the employer-initiated turnover rate is greater than or equal to 20%. The rule goes into detail on how to determine the applicable measurement period and turnover rate. If a partial termination is deemed to have occurred, then “all participating employees who had a severance from employment during the period must be fully vested.”

Other PBCG guidance

Although PPA did not change the variable-rate premium — it remains $9 per $1,000 of Unfunded Vested Benefits (UVBs) — it did change how unfunded vested benefits are measured. Final PBGC regulations provide that UVBs are measured at the valuation date for the plan year coinciding with the premium year using participant census and assets as of that date. Small plans eligible for Variable Rate Premium (VRP) cap may pay cap amount and avoid the UVB calculation. The filing deadline was extended for small plans. Other can pay estimated VRP and correct without penalty, but with interest, by the end of the 16^th month after the start of the premium year.