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Session 801 - Dialogue with Treasury and IRS
Presenters: Donald J. Segal, James E. Holland, Martin Pippins,
Harlan M. Weller
Recorder: Susan E. McDonald

Harlan Weller emphasized that the individual opinions expressed were not necessarily the opinions of the employers represented.  The guidance process represents the efforts of the Employee Plans division. 

Mr. Weller continued by saying that there are tranches of guidance being released for the Pension Protection Act (PPA).  Smaller pieces of guidance are being released by individual deadlines.  Guidance for quarterly contributions due April 15, 2008 is going to be released in time.  We should watch the Federal Register every day.

Mr. Weller expressed gratitude for the helpful comments from firms, associations and individuals.  If the comment period is closed, continue to send comments in, as they will be considered.  Try to send in anomalies via email or other written media as translation errors are difficult to avoid when taking phone calls.  Anomalies maybe results that the IRS did not want to happen, results that the IRS did want to happen or items that are truly errors.  Question text is released via the Freedom of Information Act so do not put any plan sponsor’s detailed information in comments.

Mr. Weller stated that the fourth tranche of guidance on IRC 430 will be released shortly.  The second tranche of guidance on the market rate of return and the second tranche of guidance on multiemployer issues will be soon.

Question 1

The issue is how to determine the funding target and target normal cost on a plan that provides a disability benefit.  How are accruals determined for plan that immediately pay the accrued benefit, plans that pay a benefit at retirement with continued pay at the current level and plans that continue to accrue service throughout the period of disability?

Suppose a participant entered at age 25, is now age 30 and the expected date of disability is age 52.  What is the accrual period; when is the benefit fully accrued?

Answer 1

Comments have been received on this issue.   If 15 years of service are needed to be eligible for the benefit, then the benefit must be accrued over 15 years.

The accrual period is the time period required to be eligible for the benefit.  The present value will be calculated using the assumptions.  If only one year of service is required to be eligible for the benefit, then the benefit is fully accrued after one year.

Prior to January 1, 2008, plans were valued with no disability decrement.  This would be a challenge to the premise that assumptions are reasonable, if a disability benefit is payable from the plan.

Question 2

Concerning lump sums and PPA, lump sums were previously paid under IRC 417(e).  The plan document states that pre-retirement mortality will not be used in determining lump sums.  The terms of the plan must be followed.  Amending the plan to include pre-retirement mortality now will create a 411(d)(6) issue. 

Answer 2

An amendment could be made prospectively.  PPA provides segment rates and new mortality rates.  There is 411(d)(6) relief for changing interest rates and mortality to those rates as provided in PPA. 

Question 3 

A collectively bargained plan has 01/01/2009 for its presumptive date.  The delay in regulations or guidance for collectively bargained plans applies to both codes sections 430 and 436.  What liability measures can be used for the calculations?

Answer 3

If guidance for 436 is delayed, then a look back to current liability would be in order.

Question 4

For a small plan and calculations regarding IRC 430, is it permissible to not use pre-retirement mortality?

Answer 4

Yes.  Use the PPA-specified mortality where you are discounting for mortality.

Question 5

For a new plan effective 01/01/2008 with no prior service, there is an anomaly in the AFTAP calculation of zero divided by zero equaling zero.  Should the target normal cost be used in the calculation of the AFTAP?

Answer 5

For 2008 the regulations are not effective so you must follow the statute.

Question 6

A participant is grandfathered with his benefit almost at the average of three years of pay.  The participant is in excess of age 70 and actuarial increases on the benefit are included.  Can the accrued benefit include the actuarial increases?

Answer 6

The point of grandfathering is to include the actuarial increases on the accrued benefit (the actuarial increase must be in the definition of the accrued benefit).

Question 7

A plan is frozen and there are no benefit accruals.

If the AFTAP is less than 80%, are lump sums precluded?

If so, is an ERISA notice required?

Answer 7

Lump sums are precluded.  The purpose of PPA for an underfunded plan is to not deplete the assets.

The answer to the second question does not belong to the IRS as this issue is not in their court.  The members of this panel have no authority to answer.

Question 8

A plan has AFTAP less than 80% so lump sums cannot be paid.  Can zero cash-outs be paid to avoid paying PBGC premiums on these participants?

Answer 8

Yes.  This is not an acceleration of benefits.  This will be a reasonable approach once technical corrections have been passed.  This will be addressed after the next tranch of guidance, hopefully at the end of May, 2008.

Question 9

This is a question on 411(d)(6).  A cash balance plan has a prior benefit, so the resulting benefit is the greater of A and B.  The plan sponsor is trying to keep symmetry between benefits A and B.  The cash balance account was previously converted to an annuity using 417(e)(3) rates and the applicable mortality.  Cash balance accounts are now converted to annuities using the segment rates and PPA mortality.

Answer 9

There does not have to be any grandfathering of the old rates and the old mortality.  The shift to the new 417(e)(3) rates is not an impermissible cutback under 411(d)(6).

Question 10

For calculating the cushion amount, must amendments for increases in benefits for HCEs in the prior two years be excluded. 

Answer 10

Yes, and amendments that are automatic to increase 415 limits and 401(a)(17) limits are also included in this restriction.  For a plan year beginning 01/01/2008, benefit levels in 2005 must be used, as from 01/01/2006 to 01/01/2008 is exactly equal to two years.  The language in the statute states amendments within the last two years.

There was a 404 notice last year.  This will be in the technical corrections for code section 404(o).

Question 11

This is a question on a death benefit lump sum.  The AFTAP is 79%.  The death benefit is equal to 100 times the monthly benefit.  The plan is funded with life insurance.  When the benefit is paid, there will be a gain from the life insurance contract.  This gain will place the AFTAP above 80%.  Can the death benefit be paid?

Answer 11

No, the death benefit cannot be paid.  Wait for improved AFTAP next year and then pay the benefit.

Question 12

The final AFTAP for a plan is less than 80%.  Can the plan be terminated in 2008 and lump sums paid out?

A general concept is that it is not a good result if a plan cannot terminate because of code section 436.

If the plan is amended to terminate, can the AFTAP be re-measured?

Is plan termination an increase in benefits?

Answer 12

Lump sums cannot be paid out on plan termination if the AFTAP is less than 80%

There would be no restrictions on lump sums if the AFTAP was over 80%.

Even if the plan is funded up to 100% during 2008, the AFTAP is less than 80%.  The AFTAP cannot be re-measured if the plan is amended to terminate.

The final regulations released in the fourth tranche will provide the answer to whether the plan termination is an increase in benefits.

Question 13

Clients want a stable FTAP over time. They want to invest assets to move with liabilities.  I submit for your consideration a request for you to release more detailed information in regards to building the yield curve information, including the bonds that were used.

Answer 13

The yield curve was generated by Treasury employees who deal with the financial markets.  Each individual bond included in the database is proprietary information.  A white paper on the methodology has been released.  A Powerpoint document with numerous pages is scheduled to be released in a month or so.

Question 14

This is a question on the normal retirement regulations.  Is a normal retirement age between ages 55 and 62 presumed to be okay?

Is the normal retirement age measured according to the industry or just within the employer or both?

Answer 14

The preamble to the regulation states that an age from 55 to 62 will get deference in a facts and circumstances test.  For an example, leaving Ford to go to work for General Motors is not retirement.  The regulation came out from an audit of small plans about 15 years ago.

Information in regards to the industry must be obtained.  It can be region-specific.  Trade associations have the data.  You cannot just look at your own company because many could be retiring due to downsizing.  A company is not an industry.

It is acceptable to set the normal retirement date at age 62 and offer fully subsidized early retirement at age 55.

The reason for IRS concern is that the normal retirement date is set artificially low and in-service distributions are triggered.

Question 15

The FTAP percentage will be placed on Schedule B.  The FTAP increases to 88% from 81% after contributions are deposited and the credit balance has been waived.  There are other changes occurring in the census.  Can the AFTAP be changed to 88%?

Answer 15

You should have done a range certification.  There are categories of material changes in the regulations.  You knew there were census changes but you certified anyway.  A range certification would have been more appropriate.

Question 16

This is a question on code section 436 for collectively bargained plans.  There is no delayed effective date for code section 436.  This is a tax deduction issue for a plan not at-risk.  Is the tax deduction available?

Answer 16

The next business plan for guidance will be July 1, 2008 through June 30, 2009 and this will be addressed at that time.

Question 17

This is a question on a non-ERISA plan (not subject to Title I) and the AFTAP is less than 60%.  The plan is subject to 4980F.  Are there notice requirements?  Is there a 4980F excise tax payable for not sending out a comparable notice?

Answer 17

No, if the plan is not subject to Title I, then there are no 204(h) notices.

The answer to the excise tax question is unknown.

Question 18

This is a question on small plan normal retirement ages.  This is not a plan for doctors or lawyers.  Employees work until their 70s or 80s or when the business closes after 2 or 3 years.  What is a reasonable retirement age?

Answer 18

If the business is yielding enough income to provide a 415-level benefit, then it must be doing well.  What is the advantage of setting an early retirement date?  The regulatory structure is not going to change.

Question 19

For a disability benefit where additional service is accrued, how is the target normal cost and target liability calculated?

Answer 19

No matter the eligibility, either immediate or 15 years, use projection of service while active until the point of disability.  Use consistency across the differing eligibilities for a disabled benefit.

Question 20

This is an AFTAP issue; the transition rule is being used to certify the AFTAP.  If the AFTAP is 92% in 2008 with no credit balance subtraction, will it be 82% next year until September 30, 2009?

Answer 20

Yes.

Question 21

The normal retirement age is age 62.  There is fully subsidized early retirement at age 55.  Is it reasonable to assume 100% retirement at age 55?

Answer 21

Bifurcate the plan before and after January 1, 2006, which is the effective date of the 436 regulations.

There are amendments required to conform to the law.  Implement by increasing benefits or a reduction in benefits for the HCEs.

If you choose the more expensive way to implement, then the changes will be subject to amendments.

Amendments pursuant to PPA do not have to be made until 2009.

Question 22

This is a question about the exemption test for establishing the 7-year amortization base.  The plan sponsor elects to use a portion of the pre-funding balance.

Must the full amount be offset?

Answer 22

The statute states any portion can be offset.  This will be addressed in a proposed regulation.

Question 23

This is a question on 415 limits.  The benefit is payable as an annuity with COLA plus a lump sum.  Can the COLA on the annuity be ignored for purposes of the 415 limits?  There is language in the plan document to never allow COLA increases to increase the annuity benefit plus lump sum to be greater than the 415 limit.

Answer 23

No.  Convert the annuity with COLA to an equivalent annuity.  There is a prior Gray Book question and answer on this issue.

Question 24

This is a question on 420 transfers.  The regulations state to ignore Medicare Part D rebates.  The plan sponsor knows the insurer and knows the insurer is getting rebates.

Answer 24

Regulations on this item are not a priority.

Question 25

Do code §430 and §436 have delayed effective dates for collectively bargained plans?

Answer 25

No, there is a delay for 436 only.