MAP-21 Segment Rates. Supplemental reading: Revenue Notice PBGC Technical Updates 12-1 and 12-2

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Emmeline Francis
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1 MAP-21 Segment Rates Supplemental reading: Revenue Notice PBGC Technical Updates 12-1 and 12-2 Determination of MAP-21 adjusted segment rates o Each of the 3 segment rates is adjusted (if necessary) to fall within a specified range. Only the segment rates that fall outside of the range are adjusted the others are unchanged under MAP-21. o The range is based on a segment rate that is determined using the average of the last 25 years of segment rates for the period ending on 9/30 of the calendar year preceding the first day of the current plan year. Note that the valuation date is irrelevant with regard to the prior 9/30 date used. For example, for the 2013 plan year, the 25-year average segment rate is determined as of 9/30/2012, regardless of whether the valuation date is 1/1/2013 or 12/31/2013. Similarly, for a plan year that begins on 11/1/2013 and ends on 10/31/2014, the 25-year average segment rate is determined as of 9/30/2012 (because 2012 is the calendar year preceding the 11/1/2013 first day of the plan year). o The size of the ranges is phased in For plan years beginning in 2012, the MAP-21 adjusted segment rate must be no less than 90% and no more than 110% of the 25- year average segment rate. For plan years beginning in 2013, the range is no less than 85% and no more than 115% of the 25-year average segment rate. For plan years beginning in 2014, the range is no less than 80% and no more than 120% of the 25-year average segment rate. For plan years beginning in 2015, the range is no less than 75% and no more than 125% of the 25-year average segment rate.

2 For plan years beginning after 2015, the range is no less than 70% and no more than 130% of the 25-year average segment rate. Purposes for which MAP-21 segment rates are used (and not used) o MAP-21 segment rates generally are not used in years for which the full yield curve is elected. Generally, if a plan sponsor has elected to use the full yield curve, IRS approval is required to change assumptions in order to begin using the segment rates. However, if an election to use the full yield curve is in effect as of July 6, 2012, and the plan sponsor revokes that election no later than July 5, 2013 (one year after the enactment of MAP-21), then no IRS approval is needed. This will allow the plan to take advantage of the new MAP-21 rules. The revocation must be made in writing to the enrolled actuary and the plan administrator, and cannot be changed. o The MAP-21 rates are used for: IRC section 430 funding Applying benefit restrictions under IRC section 436 (including the determination of the AFTAP) Adjusted market value of assets for PBGC variable premiums Funding shortfall for purposes of the ERISA section 4010 filing exemption for controlled groups with a combined funding shortfall of no more than $15, (use the MAP-21 rates for both the funding target and discounting receivable contributions to be added to the actuarial value of assets)

3 o The MAP-21 rates are not used for: Determining deductible limits under IRC section 404(o) Calculating the minimum lump sum distribution under IRC section 417(e)(3) Determining the amount of excess assets that can be transferred to a retiree health plan under IRC section 420 Calculating the FTAP to be used for purposes of determination of whether information reporting is required under ERISA section 4010 Calculating the standard premium funding target or the alternative premium funding target for purposes of the PBGC variable rate premium

4 Effective date of MAP-21 segment rates o The MAP-21 segment rates generally must be used for plan years beginning in 2012 and later. o An election may be made by the plan sponsor not to have the MAP-21 rates apply for any year beginning prior to 2013 either: For all purposes Only for purposes of determining the AFTAP under IRC section 436 o If an election is made to defer application of the MAP-21 rates, it must be made in writing by the plan sponsor to both the enrolled actuary and the plan administrator. It must also state whether the use of MAP-21 rates is deferred for all purposes, or only for determining the AFTAP under IRC section 436. The election is irrevocable, and must generally be made by the due date of the Form 5500 (including extensions). o Note that if no election is made to defer application of the MAP-21 rates for purposes of IRC section 436, and the AFTAP certification for 2012 has already been done using the unadjusted segment rates, then there are issues with regard to the re-certified AFTAP and whether it represents a material change (which could result in plan disqualification) or an immaterial change. Generally it will be deemed to be an immaterial change. See Revenue Notice , Q&A T-3(d) for more information.

5 Question 187 Plan year: Calendar year Month for determining segment rates under IRC section 430(h)(2)(C): November Unadjusted segment rates for November, 2013: (3%, 5.5%, 6.4%) 25-year average segment rates: As of 9/30/2012: (6%, 6.75%, 7.5%) As of 9/30/2013: (5.9%, 6.7%, 7.4%) As of 9/30/2014: (5.85%, 6.65%, 7.35%) What is the sum of the MAP-21 segment rates for the 2014 plan year?

6 Solution to question 187 For the 2014 plan year, the November 2013 segment rates are used. However, under MAP-21, each of those segment rates must be no less than 80% and no more than 120% of the 9/30/ year average segment rates (the 9/30 during the calendar year preceding the first day of the current plan year). Each of the segment rates as of November 2013 is smaller than the corresponding 25-year average rate. So only a comparison of 80% of the 25-year average rate is necessary. 80% of 9/30/2013 average rates: Segment 1: 80% 5.9% = 4.72% Segment 2: 80% 6.7% = 5.36% Segment 3: 80% 7.4% = 5.92% The November 2013 segment 1 rate of 3% must be increased to 4.72%. The November 2013 segment 2 rate of 5.5% is not adjusted because it exceeds 5.36% (80% of 6.7%). Similarly, the November 2013 segment rate of 6.4% does not need to be adjusted. The MAP-21 segment rates for purposes of IRC section 430 for 2014 are: (4.72%, 5.5%, 6.4%) Total of the MAP-21 segment rates = 4.72% + 5.5% + 6.4% = 16.62%

7 Question 188 Plan effective date: 1/1/2006 Vesting schedule: 100% immediate Funding target as of 1/1/2013: Using spot segment rates $1,000,000 Using smoothed segment rates (before reflecting MAP-21 rules) 1,100,000 Using MAP-21 segment rates 850,000 Market value of assets as of 1/1/2013 (not including receivable contributions for 2012): $600,000 Contribution for 2012 (deposited on 6/1/2013): $40,000 Plan effective rate for 2012: Without regard to MAP-21: 4.5% With regard to MAP-21: 5.5% There have always been more than 100 participants. The 2013 PBGC variable premium is to be paid on 8/1/2013. $X = PBGC variable premium for 2013 using the Standard Premium Funding Target $Y = PBGC variable premium for 2013 using the Alternative Premium Funding Target What is $X - $Y?

8 Solution to question 188 The variable rate premium is equal to 0.9% of the unfunded vested benefits. The unfunded vested benefits are equal to the excess of the funding target over the market value of the assets as of the 1/1/2013 valuation date. The market value of the assets are increased by the interest adjusted receivable contribution for 2012 (adjusted using the plan effective rate for 2012) that have been paid on or before the date that the premium is paid. Since the premium is paid on 8/1/2013, the receivable contribution paid on 6/1/2013 is included in the market value of assets. The receivable contribution must be discounted using the MAP-21 plan effective rate for 2012 (since there is no mention of an election to postpone recognition of MAP-21 to 2013, it must be assumed that MAP-21 applied for the 2012 year). See PBGC Technical Update Adjusted market value of assets = $600,000 + ($40, /12 ) = $639,118 Note that although MAP-21 does not have an effect on the liabilities used to determine the premium funding target, it does have an effect on the value of the receivable contribution. The unfunded vested benefits using the standard premium funding target is based upon the funding target using the spot segment rates. So, for purposes of the Standard Variable Premium: Unfunded vested benefits = $1,000,000 - $639,118 = $360,882 Rounding the unfunded vested benefits up to the next multiple of $1,000, $X = 0.9% $361,000 = $3,249 The unfunded vested benefits using the alternative premium funding target is based upon the funding target using the smoothed segment rates. The smoothed rates adjusted by MAP-21 are not used for purposes of PBGC premiums (see PBGC Technical Update 12-1). So, for purposes of the Alternative Variable Premium: Unfunded vested benefits = $1,100,000 - $639,118 = $460,882 Rounding the unfunded vested benefits up to the next multiple of $1,000, $Y = 0.9% $461,000 = $4,149 $Y - $X = $4,149 - $3,249 = $900

9 Question 189 Plan effective date: 1/1/2008 Data for defined benefit plans of Companies A, B, and C, members of a controlled group, as of 1/1/2014: Company A Company B Company C Funding target (without regard to MAP-21) $10,000,000 $20,000,000 $30,000,000 MAP-21 funding target 9,000,000 18,000,000 26,000,000 Actuarial value of assets 8,200,000 17,000,000 16,500,000 Prefunding balance 300, There have never been any waivers of minimum funding standards and all contributions required under IRC sections 412 and 430 have been made timely. There were no receivable contributions for Consider the following statement: An ERISA 4010 filing is required for Is the above statement True or False?

10 Solution to question 189 A 4010 filing for the entire controlled group is avoided if the FTAP is at least 80% for each plan as of 1/1/2014. The funding target for the FTAP must be determined without regard to the MAP-21 stabilization rates. The FTAP for the plan of each company is: Company A: Company B: Company C: ( 8,200, ,000) 10,000,000 17,000,000 = 85% 20,000,000 16,500,000 = 55% 30,000,000 = 79% Generally, the employer would be subject to an ERISA 4010 filing for 2014 because the FTAP for at least one member of the controlled group is under 80%. However, the controlled group would be exempt from a 4010 filing for the year if the net funding shortfall for the three companies does not exceed $15,000,000. The funding shortfall for this purpose is determined without regard to the funding standard carryover and prefunding balances, but using the MAP-21 stabilization rates for purposes of determining the funding target. Funding shortfall for Company A = 9,000,000 8,200,000 = 800,000 Funding shortfall for Company B = 18,000,000 17,000,000 = 1,000,000 Funding shortfall for Company A = 26,000,000 16,500,000 = 9,500,000 The total funding shortfall is 11,300,000 (800, ,000, ,500,000). Therefore, the total funding shortfall is less than $15,000,000 and the controlled group is exempt from the ERISA 4010 reporting requirement. The statement is false.

Funding-Based Benefit Limits for Single Employer Plans (IRC section 436) Full Version

Funding-Based Benefit Limits for Single Employer Plans (IRC section 436) Full Version Requirements of IRC section 436 apply only to single employer or multiple employer plans (not multiemployer plans)