1 Late Breaking Developments Final IRC §§ 430 and 436 Regulations Thomas G. Vicente, FSA, EA November 19, 2009

2 Topics for Discussion  Final §430/436 regulations  Forthcoming IRS guidance  Funding relief legislation  Other issues

3 Final §430/436 Regulations  Final regulations released October 7, 2009  Published on October 15, 2009  Effective for plan years beginning on or after January 1, 2010

4 Scope of Final §430 Regulations  Address: –Assets, Liabilities under PPA –Carryover and Prefunding balances  Do not address: –Minimum Required Contributions (MRCs) –Quarterly contributions –Hybrid plans

5 Key Points in Final §430 Regs  PFB additions  Interest rate elections  Asset method elections  Standing elections permitted (but not for quarterlies)  Revoking certain elections  Allocation of benefits  Reflect some 436 limits in valuation  Mid Year Amendments  UCEB’s  At-Risk rules

6 Final §436 Regulations  Key changes & clarifications from proposed regulations: –Range certification extends deadline –CBA status –Restrictions on terminated plans –ASD’s and options for participant elections –417(e) rules application to bifurcated benefits –Presumptive AFTAP’s –Changes to AFTAP’s (Material and Immaterial) –Treatment of plan amendments

7 Final §430/436 Regulations  Similar to proposed regulations in many areas, but some surprises –And still some ambiguity!

& 2009 Reasonable Compliance  IRS Notice “reasonable interpretation” of §430 or §436 – good for 2008!  March 2009 Special Edition employee plans news – good for 2009!employee plans news  So, 2008 and 2009 approaches can generally stay in place until the beginning of the 2010 plan year

9 Final §430 Regulations  Key changes from proposed regulations: –Interest rate and asset method method elections –Funding balance elections –Allocation of benefits that are not a function of accrued benefit or service –Reflection of §436 benefit limitations –Reflection of mid-year plan amendments –Rules for at-risk plans –Reflection of UCE benefits

10 Final §436 Regulations  Key changes from proposed regulations: –Range certification extends deadline of final cert. –Exception for terminated plans –Requirements on updating certifications –ASDs and options for participant elections –417(e) rules application to bifurcated benefits –Treatment of plan amendments –CBA status

11 Automatic Approvals for Method Changes  2008 FM changes automatically approved  2010 FM changes (to comply with these final regs) are automatically approved –Alternatively, earlier automatic approval (2009 or even 2008 is still open) – but then, automatic approval would not be available in 2010  Two automatic approvals in three years

12 Interest Rate Elections  Initial elections in 2008 do not require approval  2009 and 2010 elections are automatically approved (so your 2009 elections are not locked in)!

13 Interest Rate Elections (cont.)  For 2010 forward  Standard is segment rates with no lookback –any alternate requires Plan Sponsor’s written election to EA  Segment rates with lookback or yield curve are alternates –segment rates allow up to a 4 month look back  No lookback allowed with yield curve! (2010+). –e.g. calendar year plan would use December yield curve data published in January  Can elect alternate without approval (e.g., can elect yield curve if used segment rates in 2010) –But changing back to segment rates again will require approval

14 Interest Change Examples  Use full yield curve in 2009  Use segment rates in 2010 with look-back  2011 options –Full yield curve – no approval needed –Segment rates with different look-back – approval needed

15 Asset Method Elections  Change in asset valuation method for 2008, 2009 or 2010 is automatically approved!  The automatic approvals are only for the first plan year beginning in each calendar year

16 Asset Method Elections  Final regulations provide automatic approval for changes in asset method for: –First plan year beginning in 2009 –First plan year beginning in 2010  Regulations also clarify treatment of spin-offs and asset/liability transfers in calculating value of plan assets –Treat as plan distribution or contribution

17 Changes to Target Normal Cost  Plan-related expenses expected to be paid from the plan - include in TNC  Mandatory employee contributions that are expected to be made during the year- reduce TNC  No provision defining expenses for purposes of TNC –Investment expenses? –To be addressed by IRS in a future proposed regulation –Consistent with Asset Smoothing approach?  Effective for plan years beginning on or after December 31, 2008  Elective for plan years beginning in 2008

18 Benefits Taken Into Account in FT and TNC  Rules for allocating benefits to FT and TNC for benefits based on either accrued benefits or service (or both) –follows benefit formula –unchanged from proposed regs  Rules for benefits not based on accrued benefit or service –proposed regs said to allocate over years to eligibility –final regs - allocate over years to payable event given decrements (value x service now/service at event) –e.g., Temporary Social Security Supplement of $500 per month  Certain plan formulas may be handled by a combination of the above 2 rules –e.g., Disability benefit based on projected service at NRD

19 Reflecting §436 Limitations in FT and TNC  Proposed rules- could not reflect 436 issues in valuation  Final rules –UCEB’s - reflect iff due to event which occurred before the valuation date –Mid Year Plan Amendments -if an increase in TNC (due to amendment) were included in FT would cause 436 restrictions to apply, then MUST reflect amendment in FT and TNC for that year. –Prohibited payments (i.e. restricted benefits)- take 436 benefit restrictions into account iff annuity starting date (ASD) is on or before valuation date –Limitations on Benefit Accruals- FT must reflect any limitation on benefit accruals under §436(e) applicable before the valuation date. Exception for automatic restoration of benefit accruals. TNC must not take §436(e) limits into account. Thus, do not reflect freeze unless plan is specifically amended to cease accruals.

20 Reflecting Other Limitations in FT and TNC  Iff occurred before valuation date: –Liquidity Shortfalls (must take into account restrictions on payments for periods preceding the valuation date) –High-25 Restricted Employees (reflect restriction on payments iff ASD prior to valuation date)

21 Change to FTAP  For plans with no funding target –If the Funding Target (FT) for a plan is zero, then the FTAP is equal to 100% of the plan

22 Range Certifications  Due date for final AFTAP certification delayed to last day of plan year if range certification provided on time –Plan year certification still due by first day of 10 th month of plan year –If final not provided by the end of the year, AFTAP retroactively deemed to be < 60% as of the first day of the 10th month of the plan year  Additional “less than 60%” range certification added, so 4 ranges available –Less than 60% –60% or higher (but less than 80%) –80% or higher –100% or higher

23 Presumed AFTAP: 10% Reduction  Reduction made for all plans based on the prior year AFTAP falling in the range of 80% to 90% or 60 to 70%  Reduction applied to presumed AFTAP at the beginning of the year –AFTAP adjusted for automatic waiver of credit balance per Example 2 in (g) If bft restrictions could apply, automatic waiver applied if would avoid restriction For collectively bargained plans, automatic waiver also applied if would allow amendment, payment of UCEB’s, or continued accrual of benefits –Reduction applied even though restrictions had been in place in the prior year (per the example, but not per the presumption section)

24 Presumed AFTAP: Deemed Waivers  Example for Calendar year plan with 77% AFTAP at 1/09 –1/1/09 Assets = $3,110,000 –1/1/09 COB = $110,000 –1/1/09 FT = $3,896,104  Presumed 1/1/10 AFTAP = 77% –1/1/10 Assets = $3,600,000 –1/1/10 COB = $137,500 (based on 25% market return in 2009) –1/1/10 Presumed FT = $4,496,753 (($3,600,000 - $137,500)/.77) –Deemed COB burn of $134,903 to get to 80% AFTAP –1/1/10 COB = $2,597 –AFTAP = 80% and no benefit restrictions apply at 1/1

25 Material Change to AFTAP  A change in AFTAP for a plan year can be a “material change” even if the only impact of the change occurs in the following plan year under the presumed AFTAP  No specific example of how this might apply

26 “Possible” Example?  Calendar year plan year  Events: –9/30/2009: 2009 certification issued at 85% –4/1/2009: 2010 AFTAP presumed to be 75% –5/1/2010: 2009 certification revised to 92%  Results in a ‘material change’

27 “Immaterial Changes”  Additional ctrb’s for prior plan year  Election to reduce credit balance or apply credit balance to offset prior plan year's MRC  Change in funding method or actuarial assumptions, if it required actual approval of the Commissioner (vs. deemed approval)  UCEB’s which are permitted to be paid because the employer makes the associated §436 contribution  UCEB’s which are permitted to be paid because the EA determines that increase in FT attributable to occurrence of the UCEB would not cause AFTAP to be < 60%

28 More “Immaterial Changes”  Plan amendment which takes effect because the employer makes the §436 contribution and the amendment had not been taken into account in the certification of the AFTAP  Plan amendment which takes effect because –EA determines that the increase in the FT attributable to amendment would not cause the AFTAP to be < 80%, and –Amendment had not been taken into account in the certification of the AFTAP  EA must timely recertify AFTAP after one of these events occurs for change to be deemed immaterial

29 Reflecting Plan Amendments  Extensive additions on how to handle plan amendments that address –Recertifying to reflect, and –§436 contributions made to allow them  Similar rules apply for UCEB’s and frozen accruals  When is Amendment tested? –Regulations do not refer to ‘effective’ date or ‘adoption’ date –Plan operation is the apparent trigger –ASPPA Q&A’s – Asked about corrective amendment such as cash balance “jail” situation. Response = year adopted creates legal right.

30 Example: Inclusive Presumed AFTAP & Plan Amendment  Calendar year plan to be amended 5/1/2010 to increase benefits  2009 AFTAP = 88%  1/1/10 Assets = $2,000,000 and 1/1/10 AFT not yet calculated (2010 EIR also unknown)  Presumed AFTAP at 4/1/10 = 78% (and presumptive AFT = 2,000,000/.78 = $2,564,103)  Increase in AFT due to amendment = $400,000, so sponsor must contribute this amount (adjusted for interest at highest segment rate, since EIR unknown) as §436 contribution (not towards MRC)  Inclusive Presumed AFTAP = 81% after ctrb made  After EIR calculated, excess §436 ctrb due to interest converted to §430 ctrb for CYR

31 New Certifications After Amendment  Required if –Starting from AFTAP 80% or more, or –Would be material change if not for new exceptions  Optional if –Starting from an AFTAP < 80%, or –Actuary determines AFTAP will not drop below 80% with amendment taken into account However could have material change triggered in succeeding year if AFTAP would drop from above 90% to below 90%

32 Timing of AFTAP Certifications  Is it legitimate for plan administrator to ask EA not to issue AFTAP certification until 10/1 so as to delay implementation of benefit restrictions? –Is this acceptable for the plan administrator? –Should the actuary warn the plan administrator? –Should the actuary comply with the plan administrator’s instructions?

33 Timing of AFTAP Certifications  Requested delay is a possible violation of duty of impartiality  Actuary is not a fiduciary but may be exercising fiduciary powers when making discretionary decisions that affect payment of benefits  PPA does not require that certifications be made by any specific time  Deliberate delay may put PBGC at risk and potentially harms the participants who do NOT take lump sums –Issue will become live when underfunded plan terminates and PBGC refuses to pay lump sums

34 Timing of AFTAP Certifications  Academy’s Pension Committee issued guidance note in September 2009  Final regulations do not address timing issues –May be the subject of future proposed regulations –IRS, Treasury and DOL will discuss whether issuing an AFTAP certification is fiduciary act or strictly ministerial function

35 Contribution Deduction Timing  Can employer claim prior year tax deduction for grace-period contributions reported on current year’s Schedule SB (tax year = plan year)? –Some authority for claiming deduction Regs. §1.404(a)-14(d)(2)(ii) and §11.412(c)-12 Rev. Rul PLRs/TAMs , (TAM revoked for contributions for hours worked in current tax year), –Current IRS ruling position apparently ties deduction to reporting on prior year Schedule B/SB Rev. Rul (plan must treat contribution as if actually received on last day of employer’s tax year) PLRs/TAMs , , , –How to apply when tax year ≠ plan year?

36 Contribution Deduction Timing Pre-PPA – No Big Deal –Amend prior year’s Schedule B to report all contributions deducted in prior year –Use resulting credit balance to cover current year quarterlies –Negligible interest charges for late quarterlies Post-PPA – Big Deal! –Denied deduction means taxes underpaid or late quarterlies (if contributions moved to prior year on amended Schedule SB) –Credit balance complications Written elections with fixed deadlines required to create or use Must be 80% funded to use Deemed waivers –5% additional interest

37 Pension Benefit Statements  When do you need to have the pension benefit statements issued? 12/31/09? Sometime in 2010? When? Does it matter what the “as of” date is? –DOL notice indicates statements must be “for” 2009 –If statements are “as of” 12/31/08 or 1/1/09 it would not be reasonable to delay issuance until  Will there be a frozen plan waiver?  What is expected in the description of permitted disparity.

38 Forthcoming IRS Guidance  IRS guidance is anticipated on a number of other issues in the coming months: –Final regulations on hybrid plans, with separate proposed regulations on market rate of return rules –Guidance on PPA §1107 amendment rules What §411(d)(6) relief will be available? –Final regulations on determining MRC and quarterlies under PPA

39 Forthcoming IRS Guidance (cont’d)  IRS guidance is anticipated on a number of other issues in the coming months: –Proposed regulations on WRERA funding issues (e.g., asset smoothing and plan-related expenses) –Proposed regulations on mergers and spinoffs –Guidance on §414(x) plans

40 Funding Relief Legislation  On June 24, 2009, the House Education and Labor Committee approved the 401(k) Fair Disclosure and Pension Security Act (H.R. 2989)  Includes certain DB funding provisions: –Extended amortization period for funding shortfalls arising during 2008 and 2009 –Clarification of “plan-related expenses” –Change to PBGC §4010 reporting threshold

41 Funding Relief Legislation  In August 2009, Rep. Earl Pomeroy also introduced draft funding relief legislation –Similar to H.R in some ways, with some additional provisions (e.g., temporary expansion of asset corridor)  Next step is likely a markup of H.R by House Ways and Means Committee  But outlook for funding relief is uncertain –Congress is focused on health care reform

42 Other Issues  IRS guidance on 2010 retirement plan limits–no reduction from 2009!  Academy practice notes on AFTAP certifications and mortality assumptions  Joint Board proposed CE regulations  SEC decisions on IFRS convergence  IASB Exposure Draft on potential changes to IAS 19

43 Questions?