430 and 436 Regulations - Case Studies to Prepare for 2010

Valuations

Philadelphia Actuaries ClubFebruary 16, 2010

Speakers

John Markley, Markley Actuarial Services• Enrolled Actuary • Associate of the Society of Actuaries• Member of the American Academy of

Actuaries• Fellow of the Society of Pension ActuariesCarol Zimmerman, Internal Revenue Service• Fellow of the Society of Actuaries

NOT FOR PENALTY PROTECTION: To comply with IRS requirements (Treasury

Circular 230), we inform you that unless otherwise expressly stated above, any US federal tax

advice contained in this communication (including any attachments) is not intended or written

to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal

Revenue Code or (ii) promoting, marketing or recommending to any other party any transaction

or matter addressed in this communication.

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Agenda - February 16, 2010

• Introduction

• IRS Issues Final 430, 436 Regs – 10/15/09

• IRS EP Phone Forum

• Case Studies - Funding Rules

• Case Studies - Benefit Restrictions

• Where To Go From Here?

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Introduction

• There have been numerous presentations regarding 430 and 436 Regulations, including EP Phone Forum on January 26, 2010

• We are going to move onto Case Studies and preparing for 2010 valuations

• Our presentation is intended to provide background for preparing 2010 valuations even beyond 430 and 436 Final regulations

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Case Study #1 – Funding Rules

• Limited number of plans, but big impact on the liability

• Assumption may be zero, if appropriate• Need to get information from Plan sponsors

to confirm assumption• Does computer software support a non zero

assumption?

Unpredictable Contingent Event – Assumption needed for the probability of this occurring, even if it has not

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Case Study #2 – Funding Rules

• Many Plans used October 2008 spot yield curve for 2009 calendar year valuation

• For 2010 Plan year, can switch back to segment rates with up to 4 month look-back

• No look-back available for Spot yield curve• IRS approval NOT required for switch from

default election after 2010• Strategy could be to use default election

(segment, no look back) for 2010 to allow some flexibility for 2011 and beyond

Selection of Interest Rates for the 2010 Valuation

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Case Study #3 – Funding Rules

• Many Plans used asset smoothing for 2009 valuation

• For 2010, asset smoothing will likely result in use of 110% of asset value

• However, no free ride to switch for 2011, so it may be appropriate to consider market value for 2010

Selection of Asset Valuation Method for the 2010 Valuation

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Case Study #4 – Funding RulesDoes this Plan have required quarterly contributions for 2009?

Valuation

Date Assets

Target

Liability

Target

Normal

Cost COB PFB

1/1/2008 $30 $29 $1 $2 $0

• Can the transition rules (less than 100%) be used to determine if quarterly contributions are required? Answer: No

• Do assets have to be reduced for COB and PFB? Answer: Yes

• Quarterlies are required!• Have proper quarterly elections been made for 2009?

Case Study #4 – Funding Rules Continued

• Elections must be made by Plan sponsor for Interest Rates, Carryover Balance and Prefunding Balance

• Standing Elections can be made to offset minimum required contributions, but not quarterlies (additional guidance is coming)

• 2009 Schedule SB has a process for “late” elections for quarterlies

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Case Study #5 – Funding Rules

• Final Regulations “fixed” issues with benefits not accrued in a pattern related to service or with the accrued benefit

• Example of $10,000 death benefit• Benefit in excess of accrued benefit is

allocated over years of service to date through the expected date of decrement

Allocation of Benefits

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Case Study #6 – Benefit Restrictions

• Plan has AFTAP between 60% and 80%• Lump sums payments are limited• Small amount lump sums are permitted• Is small amount $5,000 or $1,000?• Guidance is forthcoming

Are small amount lump sums permitted?

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Case Study #7 – Benefit Restrictions

• Plan AFTAP is between 60% and 80%• 50% of benefit can be paid in a lump sum• Apply minimum present value rules to each

portion separately• Also applies to Social Security leveling option

Bifurcation of Benefits

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Case Study #8 – Benefit Restrictions

• Amendments not effective if AFTAP is less than 80%

• Section 436 contribution to make amendment effective• AFTAP between 60% and 80%, full cost• AFTAP over 80%, amount needed for 80% • Not permitted if AFTAP < 60%

Plan Amendments

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Case Study #8 – Benefit Restrictions - Continued

• Amendment becomes automatically effective later in year if permitted by AFTAP

• Amendment not based on compensation may be an exception

Plan Amendments

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Frequently Asked Questions

• Ordering Rules for credit balances• Material changes in AFTAP and recertification

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430 and 436 Regulations - Case Studies to Prepare for

2010 Valuations

Any questions?