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PPA Benefit Restrictions

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  1. PPA Benefit Restrictions Presented by:Jon Joss Fidelity Confidential

  2. Agenda • Understanding underfunding • General rules of funding based restrictions • Restrictions • Contingent Event • Plan Amendments • Accelerated Distributions • Benefit Accruals • NQDC Prefunding

  3. Section One • Understanding Underfunding

  4. New under PPA Funding-based benefit restrictions Shutdown benefits Amendments improving benefits Lump sums and other accelerated distributions (SSLI, installment payments, RASDs) Ongoing accruals At-risk status Higher minimum contributions Higher PBGC premiums Credit Balance Understanding Underfunding

  5. Carried over from old law Lump sum restrictions Top-25 HCE’s Plans with liquidity shortfalls Quarterly contributions Participant disclosures All plans must now disclose funded status annually Well-funded plans have a better story to tell PBGC variable-rate premiums Understanding Underfunding

  6. Must fund toward 100% in 7 years Short- term (next 7 years) – consider accelerating contributions to Avoid bad consequences Benefit restrictions At-risk status 4010 filing PBGC variable-rate premiums Preserve/grow credit balances Reduce asset/liability mismatch Understanding Underfunding—Short Term Issue

  7. Section Two • Funding Based Restrictions • General rules

  8. FTAP/AFTAP Determination • Funding Target Attainment Percentage (FTAP) • Adjusted Funding Target Attainment Percentage (AFTAP) FTAP with numerator and denominator increased by annuity purchases for non highly compensated employees in preceding 2 years FTAP for “Fully Funded” for 436 Purposes Valuation Assets – all credit balances Funding Target (without regard to at-risk) Valuation Assets Funding Target (without regard to at-risk) • For 2007, full funding is 90% (AVA with 10% corridor, CL) • For 2008, full funding is 92%

  9. Funding-based restrictions- general rulesWhat benefits are restricted? Sponsor not in bankruptcy Accelerated distributions limited to 50% of accrued benefit / PBGC guarantee

  10. AFTAP Deadlines

  11. Types of AFTAP Certifications • Three types • Specific Certification of AFTAP • Range Certification of AFTAP • Presumed Certification of AFTAP

  12. Types of AFTAP Certifications • Specific Certification of AFTAP • Valuation date data - - seems likely • Contributions receivable not allowed • Except for 2008 plan years • Certification must be in writing and provided to the plan administrator • Should match amount reported on Form 5500, Schedule SB • Range Certification of AFTAP • Must be replaced with specific certification by October 1 • Three ranges: (60-80%), (80% or higher), (100% or higher) • AFTAP will be assumed at lowest end of range

  13. Types of AFTAP Certifications • Presumed AFTAP • At Beginning of year : AFTAP = AFTAP for prior plan year • On April 1st – if less than 90% funded then AFTAP drops 10% • On October 1st – if no certification, then AFTAP drops below 60%

  14. Types of AFTAP Certifications • Can use estimates • Assets reflect prior year contributions made by the certification date • For 2008 may reflect anticipated 2007 plan year contributions • Final Certification must not be a “material change” from range certification • Plan could be disqualified if final certification is “materially” different • Change is not material if caused by • Additional employer contributions • Credit balance waiver

  15. AFTAP Issues • Anticipating future contributions • 2008 §430 funding policy decisions not yet made • Asset valuation method • Yield Curve Option • Mortality • Lump sum valuation • 412(d)(2) amendment election • Data issues/ material changes • Roll forward participant data • Annuity purchase- who was an NHCE • Estimated assets- especially for 1/1 amendments, UCEs

  16. Funding based restrictions- general rulesWhat plans are affected? • Generally effective in 2008 for single- and multiple-employer plans • Delayed effective dates • Collectively bargained plans (as late as 2010 plan year) • Depends when bargaining agreements expire • Certain large defense contractors, rural co-ops, PBGC settlement plans

  17. Funding based restrictions- general rulesWhat plans are affected? Exemptions • Plans exempt from ERISA funding rules • Non- electing church plans • Governmental plans • Plans frozen by 9/1/2005 • Exempt from accelerated distribution restrictions • All other restrictions apply, but typically aren’t relevant • New plans for the first five years • Exempt from all restrictions except accelerated distribution restrictions

  18. Funding based restrictions- general rules Effective dates, generally now • Accelerated distributions and benefit accrual restrictions • Already in play, free pass for first three months • UCEB and plan amendment restrictions • Effective at start of 2008 plan year • No “free pass” for first three months • Plan cannot pay enhanced benefits until • Actuary certifies AFTAP – either 2007 or 2008 – sufficient to support enhancement, or • Sponsor contributes 100% of increase in funding target

  19. Avoiding Restrictions Four ways out Considerations

  20. Participant Notice • New ERISA 101(j) notice - Within 30 days after • Plan becomes subject to a UCEB or accelerated distribution restriction • Valuation date when AFTAP <60% for accrual restriction - Written or “reasonably accessible” electronic form - Penalty = $1,000 per day per violation - No guidance on content • No ERISA 101(j) notice required for amendment restriction • ERISA 101(j) notice satisfies 204(h) notice requirements - IRS November 2007 News Flash

  21. Section Three • Restrictions: • The Specifics

  22. UCEB Restrictions • An event not based on age, services, receipt of pay, death, disability • Restricted if, when event occurs: • AFTAP < 60% • AFTAP would be < 60% when UCEBs taken in to account • If restriction doesn’t apply at UCE date, plan must pay all associated UCEBs, even if AFTAP subsequently falls below 60% • Current-timing contribution required to avoid restriction • If AFTAP w/o new liability < 60%, total increase in funding target • If AFTAP w/o new liability is > 60%, then amount to increase AFTAP to 60% with new liability included (based on not-at-risk funding target)

  23. Plan amendment restrictions • Amendments improving past-service benefits • Formula improvements • Faster accrual • Faster vesting- not statutorily mandated • Amendments restoring previously restricted benefits

  24. Plan amendment restrictions • Exemptions • Flat $ increase < participants’ average rate of pay increase • Statutorily mandated vesting changes • Hybrid plan move to 3-year cliff vesting • Automatic “second election” when accelerated distributions are lifted

  25. Plan amendment restrictions • Restricted if, at amendment’s effective date: • AFTAP < 80% • AFTAP would be < 80% when amendment is taken into account • Current-year contribution required to avoid restriction • If AFTAP w/o new liability < 80%, total increase in funding target • Not-at-risk, at-risk, or phase-in at-risk funding target, as applicable • If AFTAP w/o new liability > 80%, then amount to increase AFTAP to 80% with new liability included • AFTAP is always based on not-at-risk funding target • If still in prior year grace period, generally more advantageous to make an additional prior-year contribution • If contribution is made, amendment takes effect on later of effective date or 1st day of the plan year

  26. Accelerated distribution restrictions • Payment in a month exceeds monthly SLA + monthly SS supplement • Lump sum ($5k Cash outs have proposed technical correction fix) • Social Security level income option (SSLI) • Installment payments for fixed period such as 5 or 10 years • RASD option (back payments with interest) • Refund of employee contributions • Cash refund annuity • Annuity purchase • Accelerated distribution restrictions are in effect on ASD or annuity purchase date • Special ASD definition in proposed regulations • If restriction doesn’t apply at ASD, plan must make all payments under elected optional form, even if restriction takes effect later

  27. Accelerated distribution restrictions • Non-annuity options: first date when all events required for participant to receive payment have occurred • Participant’s separation from service or attainment of NRA • Participant’s election • Spouse’s consent, if married • Participant’s survival to payment date, if required by plan • RASDs • Date benefit actually starts

  28. Accelerated distribution restrictionsHow do the restrictions works? Participant elects optional form of payment, with spousal consent, if married Administrator determines whether elected form is prohibited, and if so, the Participant’s ASD, the plan’s AFTAP on the ASD, and sponsor’s bankruptcy status 60% < AFTAP < 80% and sponsor not in bankruptcy AFTAP < 60% or AFTAP < 100% & sponsor in bankruptcy AFTAP* > 100% or AFTAP > 80% & sponsor not in bankruptcy Pay benefit in elected form Does option pass present-value test? Can’t pay prohibited Payment Give participant option to defer or receive non- prohibited form Yes No Can’t pay prohibited payment Give participant option to defer or bifurcate benefit * Presumed AFTAP may not be used if sponsor is in bankruptcy; must be current-year range or specific AFTAP

  29. Accelerated distribution restrictionsPartial restrictions when AFTAP > 60% but < 80% • Payments that pass present-value test can be paid To pass, at least 50% of benefit must be paid as a lifetime annuity • Options that will never pass • Lump sum • Installment payments for a fixed period • SSLI that stops at SS commencement age (no remainder “lifetime annuity” benefit) • Options that might pass • Annuity payable at RASD • Refund of employee contributions • Cash refund annuity • Some combined forms • 411(d)(6) protected lump sum available on benefits accrued before a specified date • 50% lump sum/ 50% annuity

  30. Accelerated distribution restrictionsWhat happens when restrictions are lifted? • When AFTAP crosses 80% threshold (100% for sponsor in bankruptcy) • Resume paying accelerated distributions to participants with ASDs after AFTAP certification date • When AFTAP crosses 60% threshold (sponsor not in bankruptcy) • Start doing present value test and offering bifurcation option to participants with ASDs after AFTAP certification date • Plan’s options for participants who started benefits in restricted period • Continue payments in same form that previously applied • Automatically provide opportunity to change elections • Exempt from plan amendment restrictions • Amend plan to provide one-time opportunity to change elections • Subject to plan amendment restrictions • Any election change triggers new ASD – new spousal consent, new 417(e)(3) assumptions, 415 rules for multiple ASDs

  31. Benefit accrual restrictions • Plan must be frozen if AFTAP < 60% • Will typically be triggered by presumed underfunding rules • On 4/1 if prior year’s AFTAP < 70% or no prior year certification • On 10/1 if prior year’s AFTAP > 70% and no current year AFTAP certification • Generally no reason for actuary to certify current year AFTAP < 60% • Amendments otherwise permitted (flat $ increase < average pay increase) cannot take effect while plan is subject to accrual restrictions

  32. Benefit accrual restriction What happens when AFTAP improves to at least 60%? • Unless plan provides otherwise • Accruals automatically resume prospectively • Accruals are lifted retroactive to BOY if employer contributions/provides security increasing AFTAP to 60% • Plan may provide that missed accruals are automatically restored • Exempt from plan amendment restrictions if suspension < 1 year • Subject to plan amendment restrictions if suspension > 1 year • Plan may be amended to restore missed accruals • Always treated as plan amendment, even if suspension < 1 year

  33. NQDC prefunding restriction • No new rabbi trust funding of NQDC for top officers • When any qualified DB plan is at risk • Within 6 months before or after involuntary or distress qualified DB plan termination • While a DB plan sponsor is in bankruptcy • Affected executives • Code 162(m) covered employees ($1 million deduction cap) • Executive officer subject to 16(a) of the Securities Exchange Act of 1934 • Former executive who was in either category at termination • Applies on controlled group basis

  34. NQDC prefunding restriction Plan is at risk in if and • 2007 look back FTAP < 65% NA • 2008 FTAP < 70% NA • 2009 FTAP < 75% 2009 at-risk FTAP < 70% • and later Prior year FTAP < 80% Prior year at-risk FTAP < 70%

  35. NQDC prefunding restrictions • Broad application • All types of deferred compensation • Salary deferrals • DB or DC excess plan • Target SERP