LA Advanced Pension Conference WS 1: Benefit Restrictions Top 25 and IRC 436 Lawrence Deutsch, MSPA, MAAA, EA Larry Deutsch Penguin Consulting and Design Andrew W. Ferguson, FSA, EA, MSPA Altman & Cronin Benefit Consultants, LLC (with help from Tom Finnegan on the 436 slides) 1 Today s Agenda 1. Top 25 Restrictions 2. 436 Benefit Restrictions 3. Questions 2 1
Top 25: Overview Top 25: Prevent top-paid HCEs from taking large distributions, which later cause an underfunded termination of the Plan Restricts top-paid HCEs to lifetime annuities Unless certain Plan funding conditions are met Or unless Plan benefits are relatively small Or unless top-paid HCEs provide the Plan with recourse to their payments in the event of underfunded termination 3 Top 25 Purpose (cont ) Top 25: Overview Top-25 restrictions in Treasury Regulations Not directly in statute In 1991/3 non-discrimination regulations Existed (although differently) before 1991/3 regulations Top-25 restrictions are non-discrimination requirements Does not prevent large distributions to non-hces Does not prevent large distributions to HCEs not in top 25 Only targets highest paid HCEs 4 2
Top 25: What is Restricted? Top 25 Restrictions: Cannot pay more than the lifetime annuity Plus any Social Security supplement Lump sums are restricted Other forms of payment, such as Level Income Options, may also be restricted if they exceed the lifetime annuity Death benefits generally restricted QDRO benefits also restricted Annuity purchases also affected (see Gray Book 2005-33) 5 Top 25 Exceptions: Top 25: Exceptions 1) The Plan is terminating and benefits are non-discriminatory 2) Plan is 110% or more funded after the distribution 3) Plan Benefit 1% of the Plan s liability 4) Benefit Mandatory lump sum limit ($5,000) 5) Commissioner determines that such provisions are not necessary to prevent the prohibited discrimination 6 3
Top 25: Funding Measurements Exception to Top 25: 110% Funding Liability = current liability Regs define current liability TWICE: 1) Current liability under IRC 412(l)(7) 412 current liability was killed by PPA in 2006 IRS still publishes current liability interest rates 2) Any reasonable and consistent method may be used for determining the value of current liabilities Ed Burrows plan: 412(l)(7) + 200 basis points 7 Top 25: Funding Measurements Top 25 Liability: Current Liability Gray Book Guidance 2008-30: Can use Funding Target Can also continue to use current liability 2013-8: Can use pre-map-21 Funding Target 2013-8: Can use MAP-21 Funding Target This answer preceded HATFA Since HATFA only extended corridors, and didn t increase parameters for FT interest rates, reasonable to extend concept to MAP-21 Funding Target under HATFA 8 4
Top 25: Funding Measurements Current Liability Must Be Consistent Gray Book 2005-32: the timing of changes must not operate to significantly discriminate in favor of HCEs Not clear if changes can be made from year to year: Gray Book 2005-32: The regulations require that the procedures be consistent for any given plan year. (emphasis added) The following might be suspect: 2012: MAP-21 Funding Target to achieve 110% funding 2013: Change to pre-map-21 Funding Target, so that Plan Benefit is less than 1% of liability 2014: Back to MAP-21 Funding Target to achieve 110% funding 9 Top 25: Funding Measurements Top 25: Asset Measurement Reg: reasonable and consistent Assets can be adjusted forward (Gray Book 2005-32) Cannot include receivable contributions (Gray Book 2005-32) Can only include contributions made by distribution date Can use asset smoothing (Gray Book 2005-32) Smoothing / averaging must be reasonable Consider pre-ppa smoothing methods, which were deemed reasonable at that time? 10 5
Top 25: Funding Measurements Top 25: Asset Measurement (cont ) Include all contributions made through distribution date Including contributions made for current year Reduce assets by pre-funding balance? Would appear not, since all of Plan assets available to fund benefit distributions, regardless of credit balances Top-25 similar to maximum calculations, rather than minimum 11 Top 25: Funding Measurements Top 25: When to Measure? Reg: after taking into account payment to top-25 individual Implies that measurement be made at time of payment? Does use of Funding Target imply that measurement must be at the valuation date? Gray Book 2005-32: measurement can precede date of distribution to Top-25 individual Use valuation date preceding distribution? If so, incorporate current year contributions at discounted value If so, subtract pending distribution at discounted value Also subtract other distributions made in the interim 12 6
Top 25 Example 1 Top 25: Cash Balance Plan Interest credit = 5% Ten (10) participants Each has $50,000 account balance One Top-25 HCE wants her money Assets = $500,000 Account balances exactly fully funded Liability: use MAP-21 (HATFA) Liability Nine participants are each 10 years from assumed payment 2015 HATFA second segment = 6.11% 13 Top 25 Example 1 Top 25: Cash Balance Plan (cont ) Funding Target = $455,081 9 * $50,000 * (1.05 / 1.0611) 10 + $50,000 FT funded = $500,000 $455,081 = 109.87% Top-25 measured AFTER pending distribution: Assets: $500,000 minus $50,000 = $450,000 Liability: $455,081 minus $50,000 = $405,081 Top-25 funding: 111.09% Distribution can be made Even though FT funding is below 110%! 14 7
Top 25 Example 1 Top 25 Example 1: Salient Points: 1) Funding improves after reflecting Top-25 distribution Don t despair if AFTAP just short of 110% 2) Cash balance plans generally perform well with Top-25 If projected interest credit (5% in Example) less than segment rate (6.11% in Example), Top-25 funding is favorable Assumes that most balances in 2 nd and 3 rd segment rates Opposite result if most balances in 1 st segment rate Important role for assumptions as to payment timing Interest crediting rate is also an important assumption 15 Top 25: Funding Measurements Top 25: Include Current Year Accruals? Not clear whether current year accruals included in liability Example: Plan Benefits accrue monthly, without a 1,000 hour rule 2014 accruals funded at 110% in February 2015 Top-25 lump-sum distribution requested for April 2015 At 1/1/2015, after reflecting Top-25 distribution, 111% funded At 4/1/2015, when 3 months of 2015 accruals included in liability, only 89% funded 16 8
Top 25: Funding Measurements Top 25: Include Current Year Accruals? (cont ) Example: (cont ) What if Top-25 lump sum includes a partial-year 2015 accrual? Difficult to argue that 2015 accruals should be excluded from Top-25 liability, when they are in payment pending What if current-year contributions are included in asset value? Can we include current-year contributions and exclude current-year accruals? What if Plan has 1,000-hour rule to accrue in 2015? As of April 2015, no 2015 accruals Top-25 lump sum allowed 17 Top 25: Funding Measurements Top 25: Include Current Year Accruals? (cont ) Four alternatives for current-year accruals: 1) Plan currently overfunded, so no issues 2) Exclude current-year accruals in Top-25 measurement Apprise client of risks 3) Plan sponsor funds current-year accruals as they occur If monthly contributions, front-load by several months for extra funding needed to meet 110% 18 9
Top 25: Funding Measurements Top 25: Include Current Year Accruals? (cont ) Alternatives for current-year accruals: 4) Apply 1,000-hour rule, and allow Top-25 lump sum distributions after the prior year contribution, and before anyone has 1,000 hours for the year Can use imputed hours (190 / month) rather than actual hours, to provide certainty as of timing: May 31 st is last day for CY plan distributions to Top-25 individuals If no prior year funding until after May 31 st, no window in which to make Top-25 payments 19 Top 25: Funding Measurements Plan Document Language Top-25 should be reflected in Plan document language Either through incorporation by reference, or directly Plan document might not specify funding determination Plan document might refer to 412(l)(7) Required to use pre-ppa current liability? Or does PPA, and subsequent IRS guidance, allow us to treat current liability definition as superseded? Similar question for Funding Target: MAP-21 or unadjusted? If possible, clarify with legal counsel and/or amend 20 10
Top 25 Example 2 Top 25: same Cash Balance Plan, 8 years later Nine (9) participants Each has $100,000 account balance One Top-25 HCE wants her money Assets = $1,000,000 Account balances overfunded by $100,000 Liability: use MAP-21 (HATFA) Liability Eight participants are each 2 years from assumed payment 2023 HATFA first segment = 3.00% 21 Top 25 Example 2 Top 25: Cash Balance Plan (cont ) Top-25 measured after pending distribution: 8 * $100,000 * (1.05 / 1.03) 2 = $831,370 Assets: $1,000,000 minus $100,000 = $900,000 Top-25 funding: 108.26% Distribution can t be made as lump sum What if three (3) participants want lump sum? Top-25 Liability: 6 * $100,000 * (1.05 / 1.03) 2 = $623,527 Assets: $1,000,000 minus $300,000 = $700,000 Top-25 funding: 112.26% Can three lump sums be paid, where only one cannot? 22 11
Top 25 Example 2 Top 25 Example 2: Salient Points: 1) Funding improves after payment Due to 1 st segment rate 2) Ordering of distributions, and measurement after pending payment, are important 3) If single distributions are prohibited, but multiple distributions are allowed, what can be paid? Right answer must be to allow multiple distributions, since remaining Plan is compliant with regulations 4) Plan document may need ordering rules for Top-25 23 Top 25 Exception: All HCEs? Do Top-25 restrictions apply if Plan covers only HCEs? Regs: if not necessary to prevent discrimination, then NO! Per Regs, determination of this conclusion is by Commissioner, not by Plan sponsor or his consultants What if only HCEs could participate in the Plan? Would this prevent the intended discrimination? What about the possibility of a participant accruing a benefit as an HCE, and later falling out of HCE status while still a participant? Perhaps a commitment to purchase an annuity for non-hces, so that Plan remains all-hce? 24 12
Top 25 Exception: Under 1% If Distribution 1% of Current Liability, no Top-25 Current liability must be consistent with 110% measurement Can t use pre-map-21 FT for 1%, and MAP-21 FT for 110% If Liability large enough to allow certain distributions under the 1% exception, maintain close watch on benefit growth Allow in-service distributions, so that annual distributions keep Plan benefit below the 1% threshold Include previous distributions when measuring 1% threshold? If so, how far back to count previous distributions? If not, how frequently should in-service distributions be allowed? Annually? Quarterly? 25 Top 25: Who are They? Identifying Top 25 Individuals: Must be non-excludable Must be HCE or Former HCE HCE in Top-25 Regs means an HCE who benefits under the Plan for the Plan Year Former HCE means a former employee who was an HCE in their separation year, or any year on or after age 55 Note difference: For HCE, must benefit under the Plan For Former HCE, no requirement to have been in the Plan 26 13
Top 25: Who are They? Example: Identifying Top 25 Individuals HCE works for employer 1995 to 2010 Terminates in 2010 Never participated in Plan HCE s 2009 pay is highest pay ever paid by this employer 1995 to 2010: NOT in the Top 25 (because not in the Plan) 2011 on: in the Top 25 Does this make sense? 27 Top 25: Who are They? Identifying Top 25 Individuals (cont ) 1991 Non-Discrimination Regs: HCE defined as in IRC 414(q) Plan participation is irrelevant! Top-25 looks at all employees, not just Plan participants Andrew s take: change in definition of HCE from 1991 to 1993 regs for Top-25 purposes was unintentional mistake Even so, best to follow current regulations Excluding active employees not in the Plan is most conservative, since it extends Top-25 restrictions to wider group 28 14
Top 25: Who are They? Identifying Top 25 Individuals (cont ) To determine the 25, rank by highest compensation IRS Reg (1.401(a)(4)-5(b)): largest amount of compensation in the current or any prior year Includes years prior to existence of Plan Includes terminated former employees Includes terminated individuals paid out by the Plan May only be, say, 19 current employees within Top 25 29 Top 25: Who are They? Top 25: Issues with Compensation Do you have compensation for all years for all HCEs? For employers with 25+ current HCEs, may be worth inquiring about past compensation What is definition of compensation? Since connected with HCE definition, use IRC 415(c) compensation (total compensation without limit) For partnerships, can t just use Self-employment income Must adjust for SE tax, qualified plan contributions, etc. 30 15
Top 25: Who are They? Identifying Top 25 Individuals: Must be HCE or former HCE Can restrict all HCEs and former HCEs, or as few as 25 Can expand or contract group (to not fewer than 25) without regard to anti-cutback rules (411(d)(6)) If owners are limited, may not want assets drained by non-owner HCE lump sums, so expand restrictions Andrew has had a client expand to all HCEs to stop run on the Plan 31 Top 25: Who are They? Identifying Top 25 Individuals: Restricted group can change composition Each year s data brings new ranking of compensation Change in top-paid 20% group election could change HCEs HCE de-equitized and low-paid employee for two years: Not an HCE anymore Top-25 restrictions no longer apply Since this individual drops off the Top 25 list, another individual must be pulled onto the list. This might include a longterminated former employee 32 16
Top 25: Escrow Accounts Alternative to Top 25 Exceptions: Escrow et al If none of the Top-25 exceptions apply, distribution of the lump sum can still be made, provided the Plan has recourse to it in the event of underfunded termination in the future IRS Revenue Ruling 92-76 alternatives: 1) Place distribution in Escrow account 2) Purchase a surety bond for the distribution amount 3) Secure a letter of credit for the distribution amount Here, we focus on the Escrow alternative 33 Top 25: Escrow Accounts Escrow Account provisions: 1) Must deposit at least 125% of restricted amount in escrow 2) Must maintain 110% of restricted amount in escrow If escrow balance falls below 110%, must deposit additional monies to get to 125% of restricted amount 3) If escrow account exceeds 125% of restricted amount, may withdraw funds down to the 125% threshold 34 17
Top 25: Escrow Accounts Restricted Amount ( RA ): Initial RA = Lump sum distribution minus first year s single-life annuity payments (Gray Book 1993-21) Subsequent years: adjust with interest & single-life payments Example: age 65 participant, $210,000 annuity, top-25 Lump sum (1/1/2015): $2,445,000 (5.5% interest) 2015 RA: $2,445,000 minus $210,000 = $2,235,000 2016 RA: $2,235,000 * 1.055 minus $210,000 = $2,148,000 2017 RA: $2,148,000 * 1.055 minus $210,000 = $2,056,000, Etc. Schedule of RAs can be set out in advance for all years 35 Top 25: Escrow Accounts Escrow Example: same age 65 participant Initial Escrow: $2,235,000 * 1.25 = $2,794,000 Can roll over lump sum into Escrow: $2,445,000 Additional funds needed for Escrow: $349,000 Usually supply additional funds by rollover from DC Plan, if available Then entire Escrow Account is pre-tax rollover retirement assets Annual measurement of Escrow against RA: If under 110% funded, additional funds required (to 125%) If over 125% funded, participant can withdraw funds 36 18
Top 25: Escrow Accounts Risk with Escrow: Underfunded Plan Termination If Plan terminates in a distress termination (e.g., employer is bankrupt), Restricted Amount reverts to the Plan Participant s Plan benefit reverts to an annuity Participant s Plan annuity resulting from this reversion is subject to PBGC distress termination rules This occurred with one of Andrew s clients with a handful of Top-25 Escrow accounts 37 Top 25: Escrow Accounts Dissolution of Escrow: 1) Participant is no longer in Top 25 Other employees earned enough to bump them out of the highest 25 2) Plan funding is at least 110% 3) Plan terminates in a standard termination with nondiscriminatory benefits 4) Participant s RA is below 1% of the Plan s liability 5) Participant s RA is not more than $5,000 38 19
436 Restrictions 39 436: 436 Restrictions: Overview When in a hole, stop digging Underfunded plans restricted from: b) Paying shutdown benefits c) Amending to increase benefits d) Paying lump sums or other accelerated distribution forms e) Allowing benefits to accrue (the letters cleverly match statute and regulation ) 40 20
436 Restrictions: Overview 436(b): Restricts payment of plan shutdown benefits Below 80% funding For remaining presentation, assume no shutdown benefits 436(c): Restricts amendments increasing benefits Below 80% funding 436(d): Restricts lump sums (and other accelerated forms) Limited to partial (1/2) payments: Below 80% Limit on all such payments: Below 60% 436(e): Benefit accruals suspended Below 60% funding 41 436 Restrictions: Overview Based on AFTAP: AVA minus PFB minus CFB plus non-hce Annuity Purchases Funding Target plus non-hce Annuity Purchases Funding Target: not-at-risk MAP-21 liability Under certain conditions, PFB and/or CFB are reduced if doing so would raise AFTAP to 60% or 80% AFTAP based on prior year until determined for current year 42 21
436 Funding Certification Plan Funding Level Based on: If actuary issued an AFTAP any time within the first nine (9) months of the plan year, that AFTAP Either a Range Certification or a specific AFTAP If Range Certification, must have specific AFTAP by year-end If no AFTAP yet issued, or issued after the ninth month of the plan year, a presumed AFTAP Presumed AFTAP applies, even if funding actually quite different Unless timing & certification rules followed, a well-funded Plan could be presumed to be severely underfunded 43 Presumed AFTAP: Presumed AFTAPs For 1 st, 2 nd, 3 rd months of the plan year, Presumed AFTAP = prior year AFTAP For 10 th, 11 th, 12 th months of plan year, Presumed AFTAP = Under 60% Punitive conclusion (is irrespective of actual Plan status) Critical to issue actual AFTAP in first nine (9) months For 4 th to 9 th months of plan year, Next slide 44 22
Presumed AFTAPs Presumed AFTAP for 4 th through 9 th Month: If prior year AFTAP between 60% and 69%, Presumed AFTAP = prior year AFTAP minus 10% Plan moves from 60% to 79% range down to below 60% Trigger for accrual and lump sum restrictions If prior year AFTAP between 80% and 89%, Presumed AFTAP = prior year AFTAP minus 10% Plan moves from unrestricted to potentially restricted Otherwise, Presumed AFTAP = prior year AFTAP No change in plan funding level 45 Presumed AFTAPs Timing of Andrew s AFTAPs: If prior year AFTAP between 60% and 69%, March 31 st If prior year AFTAP between 80% and 89%, March 31 st If prior year AFTAP below 60%, At some point, probably by year-end Otherwise, September 30 th 46 23
436 Restrictions: Exceptions Exceptions: New Plans: shutdown, amendment, and accrual restrictions do not apply for the first five (5) plan years Lump sum restrictions still apply If any participants common to another DB Plan of the employer or predecessor employer within the last 5 years, plans combined for this purpose Frozen Plans: if frozen at all times on and after 9/1/2005, lump sum restrictions do not apply 415(b) increases after 9/1/2005 vacate this exemption 47 436(c): Amendments Amendment subject to 436(c): Increases benefits or adds new benefits Changes the rate of benefit accrual Changes the rate of vesting Notable exceptions: 1) No increase in Funding Target Amendment increases future benefits only 2) Flat-dollar plan increases Only if rate of increase doesn t exceed average comp increases 48 24
436(c): Amendments Possibilities for Plan Amendments 1) Plan + Benefit Increase is 80% funded Amendment effective in any case / no restrictions 2) Plan below 80% funded, but Plan sponsor contributes the increase in the Funding Target due to amendment 3) Plan without Benefit Increase is 80% funded, and Plan sponsor contributes enough so that Plan + Benefit Increase is 80% funded 4) Benefit Increase does NOT take effect 49 436(c): Amendments What if Amendment adopted during Restrictions: 436: Need either: Contribution sufficient to remove amendment restriction, or AFTAP certification during year that allows amendment If so, Amendment takes effect during the year If no contribution and no such AFTAP, then: If Amendment states conditions for its future effectiveness, follow conditions If Amendment silent, Amendment never effective When drafting amendments, include effectiveness language? 50 25
436(d): Lump Sums Lump Sum Restrictions: Under 60%: Distributions restricted to single-life annuity amount Annuity purchases also restricted At least 60% and Under 80%: Distributions in excess of single-life annuity partially restricted Plan must allow one-time payment of lesser of: 50% of total payment PV of maximum PBGC guaranteed benefit Alternative: can defer payment (subject to normal rules like RMDs) 51 436(d): Lump Sums Partial Lump Sum Restrictions (60% to 79%): First half of benefit paid without restriction (e.g., lump sum) Options for other half ( restricted portion ): 1) Elect a different payment form Example: 50% lump sum paid, with remaining half benefit paid as an immediately-commencing joint-and-survivor annuity 2) Defer commencement of entire benefit Still subject to RMD rules and other qualification requirements Can defer remaining half benefit only so long E.g., Plan states that DVTs must commence by NRD 52 26
436(d): Lump Sums Partial Lump Sum Restrictions (60% to 79%): Options for other half ( restricted portion ) (cont ): 3) Plan MAY allow deferred commencement on restricted portion Example: 50% lump sum paid, with deferral of restricted portion Deferral subject to RMD rules, qualification rules, and Plan text If half benefit no longer restricted prior to application of other rules that would force commencement, participant has new election period 53 436(d): Lump Sums Partial Lump Sum Restrictions (60% to 79%): Options for other half ( restricted portion ) (cont ): 4) Plan COULD allow participants who commenced the restricted portion to make another election once restrictions lifted Example: elected ½ lump sum, and ½ lifetime annuity Restrictions lifted this year Plan amended to allow election with regard to remaining ½ lifetime annuity to convert into lump sum Explicitly a new annuity starting date under 415 and 417(e) Either as automatic plan provision, or as amendment 54 27
436(d): Lump Sums Partial Lump Sum Restrictions (60% to 79%): Options for other half ( restricted portion ) (cont ): 5) Plan MAY allow payment of restricted portion in special payments forms only available during period of restrictions Example: certain-only annuity benefit equal to lifetime annuity $100 lifetime annuity converts to $100 payments for 22-1/2 years Certain period depends on actuarial equivalence Once restrictions lifted, convert remaining future certain payments into lump sum Could instead pay lifetime annuity with lump sum conversion option, but death of participant in interim would result in loss 55 436(d) Lump Sums: Example Example: Pending 436(d) Restrictions Prior year AFTAP 95% Presumed AFTAP is 95% for first 9 months This year s AFTAP looks to be about 75% Would impose partial restrictions on Plan lump sums Mr. Big, who is not big enough to be Top 25, wants lump sum of his substantial Plan benefit What are actuary s responsibilities to Plan sponsor and profession? 56 28
436(e): Accruals Accruals restricted if funding under 60% Missed accruals while Plan under 60% What happens when AFTAP certified at 60% or above? 1) Missed accruals automatically restored & accruals restart 2) Missed accruals amended back into Plan & accruals restart 3) Missed accruals remain missing & accrual restart 4) Accruals are permanently frozen 57 Auto-Restore of Accruals 436(e): Accruals If period of missed accruals doesn t exceed 12 months, automatic reinstatement of missed accruals Even if funding less than 80% This is a special exception to amendment restrictions If period of missed accruals is more than 12 months: Treat as if restoration is an amendment See next slide 58 29
436(e): Accruals Restoration of Accruals If period of missed accruals is more than 12 months, OR If amending missed accruals back into Plan, four options: 1) Accruals restored if funding at least 80% 2) Accruals restored if contribution to increase funding to 80% 3) Accruals restored if contribution made to fund entire cost of missed accruals in prior plan years 4) Otherwise, depends on Plan language (if auto-restore) or amendment language (if not auto-restore) if missed accruals are restored once 80% funding is attained 59 No Resumption of Accruals 436(e): Accruals Plan may provide for NO resumption of accruals Effectively a permanent freeze Normally, freezing a plan would require a 204(h) notice Can issue 204(h) notice during period of accrual restriction, provided that Plan is formally amended to freeze accruals within proper 204(h) timeframe IRS Notice 2014-46 Not clear if this is workable without formal Plan amendment 60 30
436(e) Accruals: Example Example: Missing Accruals Prior year (2014) AFTAP of 65% No certified AFTAP by 4/1/2015 Presumed under 60% Accruals frozen as of 4/1/2015 Certified AFTAP of 65% on 8/1/2015 Accruals resume, as provided by Plan If no restoration of missed accruals: If 1,000-hour-accruals, may not be any actual loss of accruals For terminations during restriction period, a full loss of accruals 61 101(j) Notices Notice of 436 Restrictions = 101(j) Notice Required when: 1) Shutdown benefits limits (under 60%) 2) Lump sums partially limited (At least 60% and under 80%) 3) Lump sums full limited (under 60%) 4) Accruals limited (under 60%) Must send new 101(j) notice when restricted under (2) or (3) Example: send notice when under 60%. Must send new notice when at least 60% and less than 80% 62 31
101(j) Notices When NOT to Notice: No notice required when amendments restricted (under 80%) No notice required for lump sum restrictions if Plan has no accelerated payments forms that could be paid Example 1: Plan has mandatory lump sums up to $5,000 no lump sum restriction notice is required Example 2: Plan frozen on and after 8/31/2005 and has lump sums. Even if under 80%, no restrictions and thus no notice No notice of accrual restrictions (under 60%) if Plan is frozen by its terms (and not just by 436(e)) 63 More on that Frozen Plan Plans Not Impacted by 436(d) or (e): 1) Plan frozen on and after 9/1/2005 2) Plan frozen after 9/1/2005 and no accelerated payment forms 3) Plan frozen and remains below 60% funded Since AFTAPs do not generally impact Plan operation, and there are no 101(j) Notices, tempting not to issue AFTAPs IRS sometimes asks for AFTAPs in determination letter review On audit, IRS asks for AFTAPs Employer s lending covenants may require AFTAP Easier to issue AFTAP than to have such problems 64 32
101(j) Notices Notice when Restrictions Lifted? Lifting of shutdown restrictions: Not Required Lifting of benefit accrual restrictions: Not Required Lifting of accelerated payment restrictions: From Full (under 60%) to Partial (60% to 79%): Not Required From Full (under 60%) to None (80% or more): Not Required From Partial (60% to 79%) to None (80% or more): Depends If Plan promised a new annuity starting date for remaining half of benefit after restrictions are lifted, then 101(j) Notice is required Notice only required to affected participants 65 101(j) Notices Lifting of Partial Lump Sum Restrictions: Examples If participant elects half lump sum and defers other half under partial restrictions, 101(j) Notice required on lifting If participant elects half lump sum and commences other half as lifetime annuity, 101(j) Notice is required on lifting of restriction only if: Plan provides that remaining annuity can be converted to a lump sum on lifting of restrictions, and This conversion is a new annuity starting date 66 33
101(j) Notices Reissue 101(j) Notices Annually? Suppose a Plan is 75% funded for 2014, and has lump sums Assume a 101(j) Notice given in 2014 In 2015, Plan is presumed to be 75% funded Must a 101(j) Notice be given in 2015? IRS Notice 2012-46: must only provide notice within 30 days of first application of restrictions NO requirement to reissue 101(j) Notice But since there is no requirement to issue notice on lifting benefit restrictions in most cases, should we issue 101(j) Notices annually to remind participants that restrictions still apply? 67 101(j) Notices When Must 101(j) Notices be Issued Within 30 days of application of restrictions Restrictions apply from date of 436 measurement Including presumptions Including range certifications No notice required if restrictions lift before 30 days Except if participants affected by restrictions in the interim Not affected if participant can defer remaining half benefit and commence payment after lifting of restrictions Not affected if accruals restored after lifting of restrictions 68 34
101(j) Notices: Examples Example 1 of 101(j) Timing: Calendar year Plan with lump sums Plan 85% funded in 2014 No 2015 AFTAP by 4/1/2015 Presumed to be 75% funded on and after 4/1/2015 Since partial lump sum restrictions apply, 101(j) Notice required 101(j) Notice must include statement that restriction is the result of the application of a presumption Must issue 101(j) Notice by 4/30/2015 69 101(j) Notices: Examples Continued Example 1 of 101(j) Timing: Now suppose Range Certification for 80%+ issued 4/15/2015 Lifts restrictions on and after 4/15/2015 Since restrictions lifted prior to 4/30/2015 deadline for 101(j) Notice, the 101(j) Notice is not generally required 101(j) Notice is required for any optional-lump-sum-eligible participant who was to commence payments in the period of restriction (4/1/2015 to 4/14/2015) but only if the Plan did not provide for deferral and later commencement of lump sum on restricted half of benefit 70 35
101(j) Notices: Examples Example 2 of 101(j) Timing: Calendar year Plan adopted in 2011 First db plan sponsored by this employer No lump sums or other accelerated distributions Plan 65% funded in 2014 No 2015 AFTAP by 4/1/2015 Presumed to be Under 60% as of 4/1/2015 Since in first 5 plan years of Plan, no accrual restrictions Since no accelerated distributions, no distribution restrictions No 101(j) Notice due for 2015 71 Questions? 72 36