Transcript Restricted Distributions in DB Plans ASPPA Annual

Benefit Restrictions
Including Top-25 Paid Group
Restrictions
2009 ACOPA
Advanced Actuarial Conference
June 8th – 9th, 2009
Joan Gucciardi, MSPA, COPA, CPC
Summit Benefit & Actuarial Services, Inc.
Benefit Restrictions Today
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Treasury Reg. § 1.401(a)(4)-5(b)
PPA restrictions under IRC § 436
PPA Benefit Restrictions
Coordination with §401(a)(4) restrictions on
accelerated distributions for HCEs
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Restrictions still apply under Treas. Reg.
§1.401(a)(4)-5(b)
Look at different purposes of rules:
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§401(a)(4): protect the benefits of NHCEs
PPA restrictions: improve funding of the plan
Treas. Reg. §1.401(a)(4)5(b) Restrictions
Treas. Reg. §1.401(a)(4)-5(b)
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Restricted employees are HCEs
Required provision in defined benefit
plan document
Restriction of benefits upon plan
termination
Treas. Reg. §1.401(a)(4)-5(b)
Accelerated distributions cannot be
made to HCEs unless:
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After taking into account the amount of
the distribution for the restricted
employee,
The value of plan assets must equal or
exceed 110% of current liabilities
Definition of a Restricted
Employee
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HCE or former HCE
One of the 25 (or a larger number
chosen by the employer) nonexcludable
employees or former employees with
the largest amount of compensation in
the current or any prior year.
Should be defined in the plan document
Definition of a Restricted
Employee
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Determined on a controlled group basis
Definition of pay: use §415(c)(3) pay on a
consistent basis
Re-determine the list each year
IRS regulations provide anti-cutback relief
for plan amendments that alter the
restricted group
Example 1
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Art is an HCE for the plan year ended 12/31/08
(he earned $150,000 in 2007)
Art only earns $50,000 in 2008, so he is not an
HCE for 2009
Art terminates employment in 2009
Question: Is Art a restricted employee?
Example 1: Solution
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List all highly compensated employees
for the years 1995 (the year the
business started) - 2009
Arrange list in order of compensation,
using the highest compensation
earned by each HCE
Art is number 30 on the list and is,
therefore, not a restricted employee
Definition of Benefits for
Purposes of Restriction
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Lump sum distributions
Loans in excess of §72(p)
Any periodic income
Death benefits not provided by
insurance
QDROs for a non-participant spouse
Restrictions on Distributions
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Limited to a straight life annuity that is
the actuarial equivalent of the accrued
benefit
Plus a Social Security supplement (if the
restricted employee is entitled to receive
one)
Determination of Current
Liability and Plan Assets
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“…any reasonable and consistent
method may be used in determining
the value of plan assets and current
liabilities.”
Plan Assets:
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No guidance as to whether actuarial or
market value of assets should be used.
Definition of Current Liability
2008 Plan Years and Later
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“Current Liability” is not defined for 2008
plan years (and later)
IRS has suggested that you may:
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Substitute “target liability” for current liability;
or
Continue to calculate current liability on prePPA basis
[EA Meeting 2008 Gray Book Update, Q&A 30]
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Example 2
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Calendar plan year
As of 1/1/08, plan assets are more than
110% of current liability (determined after
the distribution)
Restricted HCE terminates in May 2009 and
wants a lump sum
1/1/09 actuarial valuation has not been
done
What should the actuary do?
Example 2: Possible Options
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Advise plan sponsor that restrictions do not
apply
Advise plan sponsor to wait for the calculation
of the 1/1/09 target liability to assure that
(after the distribution): plan assets > 110% of
target liability
Plan sponsor tells HCE “no distribution” or put
up security
Advise plan sponsor to call ERISA counsel
Security Arrangements
(Participant Action)
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Deposit funds equal to 125% of the
restricted amount in an escrow account
Post a bond equal to 100% of the
restricted amount
Purchase a bank letter of credit equal to
100% of the restricted amount
Security can be released if:
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Participant drops off high-25 list
Plan becomes 110% funded
Security Arrangements
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Restricted Amount Must be Recomputed
Each Year (if collateral agreement is
used or other security is provided)
During a plan year, the amount that
may be required to be repaid to the plan
is the restricted amount
Security Arrangements
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Restricted amount is the excess of:
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The accumulated amount of distributions
made to the employee during the period of
restriction, over
The accumulated amount of the
unrestricted limit during the restriction
period
What happens if Restricted
Lump Sums are Paid?
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Violation of plan terms
Disqualifying defect
What Happens if Restricted
Lump Sums are Paid?
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Seek a collateral agreement or other
security agreement from recipient
Ask for the money back
VCP
Contribute enough to get the plan
assets up to 110% (measured after the
distribution)
PPA BENEFIT RESTRICTIONS
PPA Benefit Restrictions
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PPA restricts distributions to plan
participants from plans that are not fully
funded to the amount of the
participant’s monthly life annuity
Effective for plan years beginning after
2007
PPA Benefit Restrictions
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PPA also requires the freezing of benefits
under certain circumstances
The degree of restriction depends on the
level of funding for the defined benefit plan
Applicable to:
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Benefit increases
Available benefit forms
Benefit accruals
Shutdown benefits
Calculation of AFTAP
430: [Assets ÷ 100% Funding Target] = FTAP
Transitional Relief for 2008 - 2010
MRC = TNC + Amortization of FTAP
 436: [Assets + Annuity Purchases]÷[100% Funding Target
+ Annuity Purchases] = AFTAP
Normally Assets are Net of COB/PFB
Exception: If FTAP is 100% or more (or transitional
rule), then Assets are Not Net of COB/PFB
► 436: AFTAP must be determined as if the plant shutdown or
increased benefits would occur
► In calculating AFTAP for 2009 and beyond, prior year ER
contributions are considered only if actually contributed by
the certification date
► Final certified AFTAP reported on the Form 5500 Schedule
SB but otherwise not filed with the IRS
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Various Types of Restrictions
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436(b) limits plant shutdown & other unpredictable
contingent benefits for plans less than 60% funded
436(c) limits the ability to amend a plan to increase
benefits for plans less than 80% funded
436(d) limits the ability to pay full or partial lump
sum distributions depending on whether the plan is
less than 60% or 80% funded
436(e) freezes future benefit accruals for plans less
than 60% funded
Various Types of Restrictions:
Exception
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Exception to 436(d) limitation on lump sum
distributions
Applicable to a plan frozen on or before
9/1/05
Section 436 Measurement
Dates
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436(d) and (e) limits can start and stop
during a plan year
436(b) and (c) limits must be
determined immediately prior to paying
the shutdown benefit or increasing plan
benefits
1st Limit – Plant Shutdown &
Unpredictable Contingent Benefits
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Portion of the benefit paid solely due to the plant shutdown or other
event (not related to age, service, receipt or deprivation of
compensation, death or disability)
Example: subsidized benefits paid upon a plant shutdown or layoff even
though the employee hasn’t attained age/svc criteria
Proposed regulations silent as to whether plan liababilities should
include probability of paying these benefits
If 2009 funding is less than 60%, plant shutdown benefits for 2009 +
2010 cannot be paid; 2010 benefits can be restored but regs treat them
as “increased benefits”
2nd Limit –
Amendment Increasing Benefits
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Any amendment increasing benefits, establishing
new benefits, changing the existing accrual rate or
changing vesting schedule
Exception for flat dollar plans
IRS view is that COLA increases under 415(b) and
401(a)(17) are “benefit increases” but mandatory
vesting changes are not
2nd Limit –
Amendment Increasing Benefits
Increase in 415 Limit is deemed to be a plan
amendment
 If AFTAP < 80%, plan sponsor may elect not to
make 436 contribution to cover cost of amendment
 If AFTAP later increases to >80%, plan sponsor
would need to retroactively pay benefits up to 415
limits (unless automatic COLA is removed from
plan)
[2009 EA Meeting Gray Book, #20]
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2nd Limit –
Amendment Increasing Benefits
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?
 To be clarified in final combined 430/436
regulations
[2009 EA Meeting Gray Book, #25]
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2nd Limit –
Amendment Increasing Benefits
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]
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2nd Limit –
Amendment to G/F Frozen Plan:
Will it Cause Plan to Lose Exemption?
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]
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2nd Limit –
Mid-Year Amendment
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Under proposed 436 regs, plan amendment
adopted and effective in mid-2008 is only reflected
in 2008 AFTATP if plan sponsor makes a 412(d)(e)
election
2009 presumed AFTAP is based on final 2008
certified AFTAP
No adjustment to 2009 presumed AFTAP to reflect
2008 mid-year amendments, regardless of impact
on funding target?
Is it reasonable to adjust 2009 presumed AFTAP to
reflect mid-year 2008 amendment?
3rd Limit – Accelerated Benefit Payments
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Plans less than 60% must not allow any “prohibited payments” for
participants with an annuity starting date on or after the measurement
date (exception for de minimis amounts)
“Prohibited payments” = any payment in excess of the monthly single
life annuity, plus Social Security supplements
Plans with funding between 60% and 79% may make “prohibited
payments” but only to the extent the present value of the payments
doesn’t exceed 50% of the total benefits (or the PBGC guaranteed
amount if less)
Annuity starting date – regs require participant’s election
Participants with restricted and unrestricted benefits must be offered
the choice to defer payment of the restricted portion or bifurcate the
benefits
Present Value of PBGC Guarantee
Sample Values for 2009
(Aug. 2008 segment rates: 4.78%, 5.45%, 5.46%)
Age
Present Value
25
$96,254
35
$138,660
45
$215,888
55
65
$349,238
$627,509
3rd Limit – 60% - 79% Range
aka “No-Man’s Land”
Options Offered to Plan Participants
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Take the QJSA or equivalent benefit forms, other
than a lump sum
Take a 50% lump sum (limited to PBGC maximum)
and defer the rest of the benefit until the AFTAP
increases to 80%
Take a 50% lump sum (limited to PBGC maximum)
and receive the balance of the benefit in annuity
form
Defer the entire benefit until the AFTAP increases
to 80%
3rd Limit – 60% - 79% Range
aka “No-Man’s Land”
Options Offered to Plan Participants
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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?
3rd Limit – 60% - 79% Range
aka “No-Man’s Land”
Designing New DB Plans
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Consider drafting a new DB plan by limiting lump
sum distributions
Lump Sum is only available when AFTAP is 80% or
above
Certainly no help for existing DB plans that offer a
lump sum
3rd Limit – Options when Distribution
Restrictions Cease
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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. The restriction is not
retroactive for anyone with ASD during the restricted period
unless the plan so provides or is amended to so provide.
The following options are available:
 Plan can continue to pay benefits in the same form
 Plan may automatically allow participants to change
elections, triggering a new ASD
 Plan sponsors may amend plan with a one-time
opportunity for participants to change their elections
4th Limit – Freeze on Future Benefit
Accruals
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Plans with less than 60% funding must freeze future benefit accruals
 Once frozen, benefit accruals are not retroactively restored if
funding improves
 Plan may provide or be amended to provide for retroactive accruals
but this is deemed to be a plan amendment increasing benefits
 Under a special rules, plans that automatically restore missed
accruals when AFTAP improves to 60% do not have to fund to the
80% AFTAP level unless the accruals have been frozen for more
than one year
Worker, Retiree, and Employer Recovery Act of 2008 will not impose
this restriction for the 2009 plan year if the plan was at least 60%
funded during 2008
Material Change in AFTAP:
Asset Smoothing
After AFTAP certified for 2008, plan sponsor
changes asset smoothing method
 Certified AFTAP > 80%, but now < 80%
 Plan pays full lump sums
 Revised certification is required
 Could subject plan to disqualification
[2009 EA Meeting Gray Book, #18]
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Three Ranges of AFTAP
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AFTAP is between 80% to 99% - bankrupt ER must
limit benefit increases + prohibited payments
AFTAP is between 60% to 79%, no benefit increases
+ partial ban on accelerated payments
AFTAP is below 60%, all the restrictions apply
Three of the restrictions can be avoided if the ER
makes additional contributions
Can the Plan Pay Lump Sums?
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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
WRERA Exception?
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Lump sums are allowed despite 436(d)
restrictions
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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)
Statutory Presumptions
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Intent: Obtain the actuarial certification ASAP during
PY
First Two Ranges are split into two halves
◦ Range 1: 80% to 89% and 90% to 99%
◦ Range 2: 60% to 69% and 70% to 79%
Jan. 1st – current year AFTAP same as prior year
AFTAP
April 1st – if prior year AFTAP was in first half of
either range, current year AFTAP = prior year AFTAP
less 10%
Range Certification
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Actuary can certify that current year AFTAP is in one
of 3 ranges:
◦ 60% to 79%
◦ 80% to 99%
◦ 100% or higher
Advantage: ignore the first two statutory
presumptions
Disadvantage: must make actual certification of
AFTAP by Oct. 1st + actual AFTAP must fall within the
range
If actual AFTAP is not within the range, plan may
have failed the qualification rules or not been
administered in accordance with its terms
End of Year Valuations
for Small Plans (< 100 participants)
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2009 AFTAP
Use 12/31/08 Funding Target + 2008 Target Normal
Cost
Use 12/31/08 assets
 Decreased by credit balance as of 1/1/09 (adjusted
for earnings/losses based on 2008 actual rate of
return if
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Assets < 94% 12/31/08 Funding Target or
12/31/07 Assets < 92% 12/31/07 Current Liability
Increased for any 2008 contributions (discounted
back to 1/1/09) made by the date of certifying the
AFTAP
What Asset Value is Used?
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Must be same value as used for §430 purposes
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Fair market value on valuation date
Use FMV in calculating average value of assets
FMV does not 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]
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Restrictions: For New Plans
(in existence less than 5 years)
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New plans: only restriction in first five
years is the inability to pay lump sums
But certification requirement still applies
Delay in Issuing AFTAP Certification
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Is it legitimate for employer to ask EA not to
issue AFTAP certification until 10/1 to delay
implementation of benefit restrictions?
Popular option
Employer can simply withhold data
Should actuary warn employer
Should actuary comply with employer’s
instructions?
Delay in Issuing AFTAP Certification:
Ramifications
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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 specif time
Problem comes to forefront when underfunded plan
is terminated (distress or involuntary) and PBGC will
not pay lump sums
Questions?