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Update on Defined Benefit Restrictions under Section 436 2010 Great Lakes Benefits Conference June 16, 2010. Carolyn Zimmerman Internal Revenue Service Kathryn J. Kennedy, Esq. The John Marshall Law School Joan Gucciardi Summit Benefit & Actuarial Services, Inc. Benefit Restrictions Today.
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Internal Revenue Service
Kathryn J. Kennedy, Esq.
The John Marshall Law School
Summit Benefit & Actuarial Services, Inc.
PPA restricts distributions to plan participants from plans that are not fully funded to the amount of the participant’s monthly life annuity
Generally effective for plan years beginning after 2007
Assets – COB –PFB
Adjustment to numerator and denominator for NHCE annuity purchases for prior 2 years
Any amendment increasing benefits, establishing new benefits, changing the existing accrual rate or changing vesting schedule
Exception for flat dollar plans
Exception for mandatory vesting changes: not subject to restrictions
IRS view is that COLA increases under 415(b) and 401(a)(17) are “benefit increases”
[2009 EA Meeting Gray Book, #20]
What about an increase in lump sum benefit due to the annual update to the applicable mortality table?
Is it a deemed amendment for 436(c) purposes?
Plan sponsor wants to provide an early retirement window
Current AFTAP is 70%
Increase in funding target is based on assumed utilization [2009 EA Meeting Gray Book, #22]
Increase in funding target must be based on actual valuation data for the current plan year [2010 EA Meeting Gray Book, #34]
Cash Balance plan needed an amendment to get out of cash balance “jail”
Amendment is effective back to 2000
Amendment will reduce AFTAP below 80%
Amendment is needed for plan qualification
Plan sponsor must contribute enough to bring AFTAP up to 80%
[2010 EA Meeting Gray Book, Q&A #33]
Plan is amended to reflect PPA Applicable interest rate (AIR) and Applicable mortality table (AMT)? NO
Plan protects pre-PPA AIR and AMT? NO
Plan changes lookback month/stability period? NO
Plan is amended to provide in-service distributions at NRA or 62? NO
[2009 EA Meeting Gray Book, #23]
1. AFTAP is > 80% after amendment
2. AFTAP is > 80% before amendment and < 80% after amendment AND plan sponsor makes a 436 contribution to bring AFTAP up to 80%
3. AFTAP is < 80% before amendment AND plan sponsor makes a 436 contribution to fully fund the amendment
Note: A 436 contribution cannot do double duty: if used to fund an amendment, then it cannot be used for 430 purposes
Suppose that the participant takes the 50% lump sum and elects to defer the rest of the benefit until restrictions no longer apply
AFTAP now is >80%
Participant has a 2nd annuity starting date and must be offered the QJSA and QOSA
[2010 EA Meeting Gray Book, Q&A #43]
What if the actuary does not issue an AFTAP?
Then AFTAP is deemed to be below 60%
No 50% lump sum option needs to be provided
Is this administrative discretion on the part of the actuary?
Might this ultimately violate the terms of the plan?
What about drafting a new DB plan by limiting lump sum distributions?
Lump Sum is only available when AFTAP is 80% or above
Old PLRs: Conditioning a benefit on the funding level of the plan is discretion on the part of the employer
If AFTAP was 60 – 79% and then certified to be 80% or more, plans must then offer lump sums for anyone with ASD occurring after the resumption
Restriction is not retroactive for anyone with ASD during the restricted period unless the plan so provides or is amended to so provide
Worker, Retiree, and Employer Recovery Act of 2008 will not impose this restriction for plan years beginning 10/1/2008 – 9/30/2009
If the plan was at least 60% funded during the prior plan year
Funding relief would extend this through 2011
Under PPA, a plan can pay full lump sum benefits only if its AFTAP is 80% or more
WRERA exception: can pay lump sum if PVAB is less than $5,000
Lump sums are allowed despite 436(d) restrictions
Payment of a benefit under section 411(a)(11)
May be distributed without consent of the participant
Applicable to beneficiaries, alternate payees, and 401(a)(9)
Must be same value as used for §430 purposes
Fair market value on valuation date
Use FMV in calculating average value of assets
FMV do not necessarily have to be updated to match audited assets
If §430 asset value changes, then AFTAP must be updated
[2008 EA Meeting Gray Book, Q&A 20]
New plans: only restriction in first five years is the inability to pay lump sums
But certification requirement still applies
Is it legitimate for employer to ask EA not to issue AFTAP certification until 10/1 to delay implementation of benefit restrictions?
Popular option: IRS is very uncomfortable with this
Employer can simply withhold data
Should actuary warn employer
Should actuary comply with employer’s instructions?
Puts PBGC at risk
Harms participants who do not take lump sums
Violation of duty of impartiality
Actuary may be exercising fiduciary powers when making discretionary decisions
PPA does not require that certifications be made at any specific time
Problem comes to forefront when underfunded plan is terminated (distress or involuntary) and PBGC will not pay lump sums