Advanced Actuarial Conference Workshop 4: Advanced AFTAP ... 02AdvancedA… · COB = $50,000 AFTAP...

2014 Advanced Actuarial Conference

Workshop 2:Advanced AFTAP/436

Tom Finnegan Jeffrey Wadle Savitz Organization Greenspan & Associates, Inc.

http://asppa.org/default.aspx


2

AFTAP Definition

AFTAP

Adjusted Funding Target Attainment Percentage

Plan assets - Credit Balances + Annuity Purchases

Funding Target + Annuity Purchases

• Annuity Purchases equals the aggregate amount of purchases of annuities for NHCEs in the last 2 years

• If AFTAP would be 100% without subtraction of balances, balances are not subtracted.



3

Benefit Restriction Thresholds

If Plan’s AFTAP is below a specified %, limitations arise on

Benefit increases – 80%

Accelerated benefit forms – 80%, 60%

Benefit accruals -60%

Unpredictable Contingent Event Benefits

UCEBs….shutdown benefits – 60%

If plan sponsor in bankruptcy - 100% applies for accelerated benefit forms



Prohibited payments questions

Are loans restricted as prohibited payments?

Are death benefits an exception as they are a form of mandatory distribution

Is a single life annuity paid annually a prohibited payment?

4



5

Benefit Increases

A plan cannot be amended to increase benefits

If its AFTAP is below 80%

If its AFTAP would be below 80% with the amendment

Sponsor may contribute a section 436 contribution to avoid the restriction

COBs and PFBs may not be applied to these contributions

Sponsor may reduce balances to bring plan to 80%, but cannot pay for the increase in funding target with COB/PFB



6

UCEBs

A plan cannot provide UCEBs

If its AFTAP is below 60%

If its AFTAP would be below 60% with the amendment

Sponsor may contribute a section 436 contribution to avoid the restriction

COBs and PFBs may not be applied to these contributions

Sponsor reduce balances to bring plan to 60%, but cannot pay for the increase in funding target with COB/PFB



7

AFTAP Certification

Requirements of Certification

Must be in writing

Signed by actuary and dated

Certify the plan’s AFTAP for the year

Provided to the Plan Administrator

What does it mean to “provide” the AFTAP?



8

AFTAP Certification

Additional disclosure requirements

Plan assets

PFB and COB

Funding target

NHCE annuity add backs for AFTAP

Amendments during year taken into account

Benefit accruals restored during year

UCEBs during year taken into account

Associated 436(f) contributions

Any other relevant factors



Assumptions and Funding Method used for the AFTAP

The assumptions and FM must be the same as final SB assumptions

If assumptions or FM are changed after AFTAP certification, could be a material modification

An assumption or FM changed with IRS approval is deemed immaterial

This can be a major issue with takeovers where prior actuary already certified AFTAP

Disclosure of assumptions needed with AFTAP to comply with ASOP requirements

9



Subsequent determinations

A certified AFTAP may change due to a subsequent determination

This is caused by a change in FT, assets or balance due to a correction, change in FM or assumptions, or a subsequent contribution or balance election

The revised AFTAP percentage is applied retroactively to the date of the initial AFTAP certification

The change may be either material or immaterial

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Subsequent determinations

When does a subsequent determination occur – when actuary is aware of change or when administrator is aware?

Is there a “subsequent determination” with respect to the calculation of the deemed reduction due to the presumed AFTAP?

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12

Material Change to AFTAP

Any change that impacts plan operations with respect to benefits addressed by section 436 is a material change unless it is listed as an immaterial change

Timing of the material change is important

A change may be immaterial initially but become material at a subsequent date due to later amendments or impact on presumed AFTAP in following year



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Example-

Plan AFTAP for 2009 was 82%

AFTAP for 2010 certified on March 31, 2010 at 85%

On July 31, 2010 a mistake is discovered and AFTAP is recertified at 92%



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Result-

The AFTAP is 92% retroactive to March 31, 2010

If no amendment or UCEB, does not impact operations until perhaps 4/1/2011

Is a material change if affects plan operation on 4/1/2011 so recertification would be required by that date. But material change is not disqualifying as never operated contrary to AFTAP



15


Example-


AFTAP for 2010 is certified on March 31, 2010 at 85%

On July 31, 2010 a mistake is discovered and AFTAP would be 78% if no deemed balance reduction



16


Result-

AFTAP is initially 78% retroactive to March 31, 2010

But this could require a deemed reduction increase it to 80%

If no deemed balance reduction, this change is material due to distribution restriction

If balance reduction, change will be immaterial absent amendments or UCEBs



17


Example-


AFTAP for 2010 is certified on 3/31/10 at 85%

On 5/1/11 a mistake is discovered and 2010 AFTAP is recertified at 92%

No balances



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Result-

Material change-

Based on the original certification, the AFTAP was presumed at 75% on 4/1/11 and restrictions applied

Using the corrected AFTAP, the presumed AFTAP at 4/1 is 92% and no restrictions apply



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Deemed Immaterial Changes

Subject to a recertification requirement, if change merely reflects a change in the FT or the value of the adjusted plan assets after the date of the EA’s certification, it is deemed immaterial if it results from-

1. Additional contributions for the preceding year that are made by the plan sponsor;

2. The plan sponsor’s election to reduce the PFB or COB (burns)

3. The plan sponsor’s election to apply the PFB or COB to offset the prior plan year’s minimum required contribution;



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Deemed Immaterial Changes

4. A change in funding method or actuarial assumptions, where such change required actual approval of the Commissioner (rather than deemed approval);

5. UCEBs which are permitted to be paid because the employer makes a section 436 contribution of full amount;

6. UCEBs which are permitted to be paid because the plan’s EA determines that the increase in the FT attributable to the occurrence of the UCEB would not cause the plan’s AFTAP to fall below 60 percent;



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Deemed Immaterial Changes7. A plan amendment which takes effect because

the employer makes a section 436 contribution of the full amount, the liability for which was not taken into account in the AFTAP certification; or

8. A plan amendment which takes effect because the plan’s EA determines that the increase in the FT attributable to the plan amendment would not cause the plan’s AFTAP to fall below 80 percent, the liability for which was not taken into account in the certification of the AFTAP.



PFB addition elections not immaterial

An election to add to PFB after the AFTAP date causes a subsequent determination by changing the BOY balance

This is not on the immaterial list

If the lack of that PFB allowed an amendment to become effective on an earlier date, the PFB addition will cause a material modification which is potentially disqualifying

22



PFB addition elections not immaterial

Standing PFB addition elections are dangerous if you do not review whether they should be revoked before 9/15

Will an additional condition in PFB addition election stating “to the extent this will not cause a material AFTAP change” violate the specific amount rule?

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Standing election to use balance to offset MRC

This is on the immaterial list with respect to the prior year MRC

A standing election can cause a change in balance retroactively to earlier years if an error is discovered – an error for 2014 discovered in 2017 can increase or decrease balance used to offset 2014

This would affect the 2015 AFTAP

Is that change to the 2015 AFTAP only discovered in 2017 deemed immaterial?

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25

Recertification Required

If plan sponsor makes section 436 contribution described in 1.436-1(f)(2)(iii)(B), (f)(2)(iv)(B), or (f)(2)(v)

If one of the items in (h)(4)(C) would be a material change



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Recertification on Request

Plan administrator may request

For any immaterial change.

For any contribution of full amount of increase in FT due to plan amendment or UCEB to avoid restriction

For any increase in FT or UCEB that can take effect with no contributions



Advantages of always recertifying?

The SB reports only the final CERTIFIED AFTAP, so not recertifying will make SB #s not match – require an attachment?

Hard to tell that any change will remain immaterial due to future amendments and deemed reductions for presumed AFTAP

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Advantages of always recertifying?

If general procedure is to always recertify, less likely required recertification will be missed by mistake

The subsequent determination does apply for next year presumption and deemed reductions – where it could become material. Too easy to forget if do not recertify when discovered.

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Recertification Example

A calendar year plan pays accelerated distributions

4/15/2010 – initial certificationFunding target = $1,000,000AAV = $775,000COB = $50,000Actuary certifies AFTAP as 72.5%Only partial accelerated distributions

All values throughout the example are adjusted to 1/1



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Recertification Example (cont.)

5/15/2010 – additional 2009 PY contribution of $100,000 (discounted)

FT = $1,000,000

AAV = $875,000

COB = $50,000

Actuary must recertify AFTAP as 82.5%

Accelerated distributions resume



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6/15/2010 – UCEB worth $200,000 (discounted)

FT = $1,200,000

AAV = $875,000

COB = $50,000

Actuary must recertify AFTAP as 68.75%

Only partial accelerated distributions

Immaterial change listed in (h)(4)(C) that would have been material if not on list



32


7/1/2010 – amendment worth $25,000;

7/1/2010 – 436(f) contribution of $25,000

FT = $1,225,000

AAV = $900,000

COB = $50,000

AFTAP would be 69.39% without COB waiver

Actuary need not recertify AFTAP as 69.39%

436(f) contribution didn’t reach the 80% threshold



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7/15/2010 – amendment worth $375,000; 7/15/2010 – 436(f) contribution of $375,000FT = $1,600,000AAV = $1,275,000COB = $50,000AFTAP would be 76.56% without COB waiver or

79.69% with waiver

Actuary must recertify AFTAP as 76.56%Even though 436(f) contribution didn’t reach the

threshold, change from below 70% to above 70% potentially changes plan operations 4/1/2011



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8/15/2010 – amendment worth $100,000;


FT = $1,700,000

AAV = $1,375,000

COB = $15,000 (after deemed waiver)

Actuary must recertify AFTAP as 80%

Accelerated distributions resume as a by-product of the 436(f) contribution for the amendment



35


9/14/2010 – additional 2009 contribution of $65,000

9/15/2010 - amendment worth $100,000

FT = $1,800,000

AAV = $1,440,000

COB = $0 (after voluntary waiver)

Actuary need not recertify AFTAP (still 80%)

Because the contribution was before the amendment, the AFTAP never dropped below 80%



36


10/15/2010 – amendment worth $100,000;


FT = $1,900,000

AAV = $1,520,000

COB = $0

Actuary must recertify AFTAP as 80%

Recertification required because 436(f) contribution made to fund to 60%/80% threshold



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Presumed AFTAPs

Until an actuarial certification is provided for current year - same AFTAP as it had at end of prior year unless changed by deemed reduction

If prior year AFTAP between 60% and 70%, or between 80% and 90%, and actuary has not certified the current year AFTAP by the first day of the 4th month

The presumed AFTAP is considered to be 10 percentage points lower, effective as of the 1st day of the 4th month

The restrictions continue until the actuarial certification, or 1st day of the 10th month



38

Presumed AFTAPs

If the actuarial certification for any plan is not completed before the 1st day of the 10th month

The plan is deemed to be less than 60% funded

The benefit restrictions applicable to <60% plans apply effective the first day of the 10th

month

The <60% is conclusive for the year

If AFTAP certified on or after 1st day of 10th

month, no deemed reduction of balance applies.



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Presumed AFTAPs

If the actuarial certification for any plan is not completed before the 1st day of the 10th month

A deemed reduction may apply in next year based on presumed AFTAP

Restriction remains until the later of actuarial certification for the year or January 1 of the next year based on AFTAP certification or deemed reduction on presumed AFTAP



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Presumed AFTAPs

Presumed AFTAPs used like AFTAPs to apply benefit restrictions

Determine adjusted funding target to reduce balances



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Presumed AFTAPs

Presumed adjusted funding target is

Interim value of adjusted plan assets

Presumed AFTAP

Interim value of adjusted plan assets is the

Actuarial value assets – credit balances -annuity purchase

Reflects receivable contribs for prior year and PFB/COB elections made by the date of calculation and “as of” the BOY



42

Presumed AFTAPs

If presumed AFTAP changed, then need to recalculate the deemed reduction and possibly resulting presumed AFTAP

Will occur if prior year AFTAP certified in current year before current AFTAP, as of the 10% reduction on 1st day of 4th month, or possibly due to a subsequent determination changing the prior year AFTAP.



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Presumed AFTAPs

The regulations only provide for a recalculation if the AFTAP itself changes, not the underlying factors used to calculate deemed reduction (or if it occurs). So an additional contribution or balance election after 1st day of year and before 1st day of 4th month will only be relevant if a 10% reduction occurs on 1st day of 4th month.



44

Presumed AFTAPs

Determine an updated interim value of plan assets which reflects

Contributions for prior plan year before date of update, and

Section 430(f) elections with respect to COB and PFB made before date of update



45

Presumed AFTAPs

New presumed adjusted FT is

Updated interim value of adjusted plan assets

New presumed AFTAP (i.e., modified)



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Presumed AFTAPs

Inclusive presumed adjusted funding target

Used to determine inclusive presumed AFTAP which is used to determine if amendment / UCEB is allowable



47

Presumed AFTAPs


Presumed adjusted funding target increased to reflect

The amendment / UCEB being tested

Amendments and UCEBs from prior year that have not been reflected in the prior year AFTAP

Amendments and UCEBs from current year that have not been reflected in the presumed adjusted funding target



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Presumed AFTAPs

Inclusive presumed AFTAP





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Presumed AFTAP Modifications

Presumed AFTAP is modified if

COB or PFB reduced (burned) to avoid restrictions due a deemed reduction using the presumed ATTAP rules. This does not apply for a normal elective reduction.



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Presumed FT and interim value of plan assets are modified if

If a 436 contribution brings the inclusive presumed AFTAP to a threshold level to allow amendment/UCEB

The modification is only for the amendment or UCEB itself and the 436 contribution, but NOT for any other contributions or balance elections in the interim?



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Presumed AFTAP is not modified if

Amendment/UCEB goes into effect without a 436 contribution needed

What if UCEB goes into effect but would drop presumed AFTAP to below 80%?

The 436 contribution needed fully funds the associated FT increase



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Presumed AFTAP Modification

Simple Example 1– Plan has presumed AFTAP of 79% before amendment

436 contribution and to fully fund amendment and FT increase raises Inclusive Presumed AFTAP to 80%

Presumed AFTAP stays at 79%

Inclusive presumed AFTAP for future amendments or UCEBS is 80%



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Presumed AFTAP Modification

Simple Example 2 – Plan has presumed AFTAP of 82% before amendment

Amendment would cause the Inclusive Presumed AFTAP to drop to 78%

436 contribution to fully fund amendment raises Inclusive Presumed AFTAP to 80%

Presumed AFTAP is modified and reset to 80%



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Presumed AFTAP Example 1

Plan has 2009 AFTAP of 91.95%

All 2009 amendments are included in AFTAP

1/1/2010 Actuarial value = 2,200,000

1/1/2010 PFB = 200,000

Amendment 2/15/2010 increases FT by 100k



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Presumed AFTAP Example 1(cont.)

Presumed adjusted FT = 2,000,000/.9195 = 2,175,095

Inclusive Presumed adjusted funding target 2,175,095+100,000 = 2,275,095

Inclusive presumed AFTAP 2,000,000 / 2,275,095 = 87.91%

Presumed AFTAP stays at 91.95%, since no 436 contribution or required

balance waiver



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Employer makes additional 2009 contribution with a 1/1/10 PV of 50,000 on 3/1/2010

Plan is amended on 3/15 to increase FT by 300,000

Inclusive Presumed adjusted funding target

2,275,095+300,000 = 2,575,095


2,000,000+ 50,000 = 2,050,000



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Inclusive presumed AFTAP

2,050,000 / 2,575,095 = 79.61%

Sponsor may make an additional contribution for prior year or a current 436 contribution or elect to reduce PFB to allow amend to take effect…but need not (unless bargained)



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VARIATION #1

Employer elects to reduce balance to allow amendment

Waiver = (.8 x 2,575,000) – 2,050,000 = 10,000

PFB reduced to 190,000

Inclusive presumed AFTAP =

2,060,000 / 2,575,000 = 80 %

Presumed AFTAP modified and reset to 80%

Only balance election made to increase AFTAP to 80% is applicable for modified AFTAP



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VARIATION #2 Instead of PFB reduction, employer makes

additional prior year contribution of 10,000 to allow amendment

Inclusive presumed AFTAP = 2,060,000 / 2,575,000 = 80 %

Since no 436 contribution and no balance waiver presumed AFTAP is not reset

Presumed AFTAP remains 91.85% On April 1 presumed AFTAP remains 91.85% No restrictions apply



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Presumed AFTAP Example(cont.)

VARIATION #2

Pitfalls and issues

Contribution must be designated as prior year contribution when made

If collectively bargained then no choice

Can run into problems if contribution at date of presumed AFTAP change



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Presumed AFTAP Example 2

Plan has 2010 AFTAP of 85%

All 2010 amendments are included in AFTAP

1/1/2011 Actuarial value = 10,000,000

1/1/2011 COB = 500,000

March 1, 2011 contribution for 2010 made with value on January 1, 2011 of 2,000,000



62


What happens on April 1, 2011? Presumed AFTAP drops to 75%

Updated interim value of assets is (10,000,000 -500,000+2,000,000)

New presumed FT is 11,500,000/.75 or 15,333,333

Assets needed are 12,266,667

Reduction of 500,000 not enough and below 80%



63


What happens on April 1, 2011? Suppose 2,000,000 can be added to PFB

If election to add to PFB made before April 1 updated interim assets become 9,500,000 (10,000,000+2,000,000-500,000-2,000,000)

New FT is 9,500,000/.75 or 12,666,667

Reduction of COB of 500,000 and PFB of 133,333 enough to bring assets to 10,133,333 or .8 times 12,666,667



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Note that timing is important

Need to designate for prior year

Need to add to PFB timely

Difference between presumed AFTAP and Inclusive Presumed AFTAP

Inclusive presumed AFTAP only used for amendments and UCEBs



Some general concepts on presumed AFTAP calculations

What if you do not have the final assets and balance to perform the above calculations –

Are there general rules to apply?

Are there some methods to avoid presumed AFTAP problems and possibly produce desired outcomes?

65



Bizarro world of presumed AFTAP calculations

Linking the presumed FT to actual BOY assets can produce some bizarre counter-intuitive results. You should be aware of these as, if you apply common-sense logic in assuming a result, you often will go wrong.

Sometimes, you need to “do the opposite”

66



Some counter-intuitive effects and bizarre situations

A distribution in the prior year helps allow the removal of a restriction

A contribution for the prior year inhibits the removal of a restriction

Need BOY assets to do final calculation, which is unavailable at BOY

For amendment restriction, often need BOTH BOY assets and FT. If you had that, you could do final current year AFTAP

Concern that, due to inability to know actual BOY assets at BOY (or even fourth month) to determine if restriction changes, a wrong “guess” might be disqualifying

67



Assets may not be as crucial as perceived

Big concern is removal of accrual or, especially, distribution restriction at BOY when BOY assets not available

How crucial are actual amount of BOY assets?

The actual information needed is the balance as a percentage of assets. The actual asset amount influences this, but only in a usually minor way

68



Removal of restriction at BOY if prior ATAP timely certified?

Should only occur if the balance, as a %age of assets, increased from prior year AFTAP to current BOY.

This is because the deemed reduction did NOT occur in prior year as balance insufficient

In the absence of something making balance trust adjustment vary from asset increase, this %age will be constant and no restriction change

69



Removal of restriction at BOY if prior ATAP timely certified?

As presumed FT is a function of the NET assets, the relationship of FT to net assets will never change prior to deemed reduction.

As the removal of the restriction will only happen if GROSS assets are at least equal to threshold %age of presumed FT (i.e. 60% or 80%), the key is the balance as a %age of assets

70



Illustration of balance as a % of assets

Prior year FT = $1,000,000. Gross assets are $799,000 and balance is $49,000. AFTAP = 75% -no deemed reduction to 80% as gross assets not 80% of FT

With a 75% AFTAP and no deemed reduction, the balance cannot be more than 6.25% of gross assets (5/80) or there would have been a deemed reduction. The necessary percentage is the difference between threshold and AFTAP (80-75) divided by threshold. The balance %age was 6.1327%

71



Illustration of balance as a % of assets

Next year presumed FT is actual assets minus balance divided by 75%. In order to have a deemed reduction occur and the restriction removed, the balance must be 6.25% of gross assets (5/80) in order for gross assets to be 80%.

Focus on balance as a %age of assets, rather than assets itself – this is the determining factor

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What can increase balance as %age of assets

A distribution or expense payment in prior year

A trust adjustment for contributions made in prior year for second prior year that changes the balance slightly differently than change in assets. Actual 430 assets at prior BOY (used for AFTAP) included this contribution with discounted value – a trust adjustment mimicking this eliminates this effect

An election to add to PFB at BOY. For the BOY deemed reductions, for this to be an issue, the election would need to be made by the first day of the year – unlikely unless planned

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What can decrease balance as %age of assets

A contribution for the prior year

A prior year election to reduce balance or to use balance for MRC

Current year election to reduce balance –unclear if could make such an election exactly on first day before presumed deemed reduction

These balance %age increases will OFFSET the decreases and make it less likely a deemed reduction, and restriction removal, occurs

74



Importance of actual BOY assets

The actual BOY assets are rarely crucial to determining whether a restriction changes at BOY.

If uncertain, do the calculation using maximum possible BOY assets (including trust adjustment) and then with minimum amount. If the result is different, then you have a problem. But this is extremely rare unless the initial margin is VERY close or extreme trust changes

The actual BOY assets are needed to determine AMOUNT of deemed reduction, but this is not something needed immediately

and tyen with minimum mpossible75



Prior year AFTAP not certified timely

If not certified by first day of tenth month, no deemed reduction should occur on prior year AFTAP

AFTAP could be 75% even if deemed reduction could have increased to 81%

Deemed reduction would generally be expected to occur at next BOY – but could possibly not happen if balance DECREASES as % of assets –by a contribution, for example

76



Prior year AFTAP not certified timely

An elective reduction could have been made in prior year before AFTAP to produce the 80% AFTAP – making the BOY presumption irrelevant. Often a good idea to do this

If a contribution increases assets so balance as a % decreases, but not by enough to avoid the BOY presumed deemed reduction, making an elective reduction in prior year will cost less balance

77



Fourth month presumption

Concepts are similar but, as with AFTAP not certified timely, the possible deemed reduction would not have occurred in prior year AFTAP

If balance as % of assets stays constant, the AFTAP in prior year based on gross assets needs to be higher than 90% to avoid a restriction. The formula is GF=> F/(1.25F-.125) where GF is prior gross AFTAP and F is actual AFTAP.

78



Fourth month presumption

If prior AFTAP was 85%, and the gross AFTAP was 90.66% or less, the balance needs to increase as % of assets to avoid a restriction. If gross AFTAP was 90.67% or more, the balance needs to decrease as % of assets to have a restriction apply.

Can avoid by elective reduction to get to 90% prior year

Greater chance of changes because of balance elections or prior year contributions after BOY

79



Suggestions for administrative procedures

THINK about possible BOY presumed AFTAP and deemed reduction in prior year and consider options

If the prior year AFTAP was very marginal (i.e. almost had a deemed reduction), more likely that a small distribution could cause a removal of the restriction at BOY or even a trust adjustment effect

80



Suggestions for administrative procedures

Easy to change balance as %age of assets at next BOY by contribution or elective balance reduction in prior year– if really think change will be so marginal that unable to determine if restriction removed at BOY, CHANGE that %age first one way or the other to make it clear

But need to do this by end of prior year

81



Suggestions for administrative procedures - continued

Can add to PFB exactly on BOY to cause a deemed reduction and remove restriction – but only consider this if you can determine the correct amount. Remember, however, first have to offset effect of contributions not added to PFB (MRC) so PFB addition larger than expected

Can consider same options before fourth month presumption to avoid, create, or make clear, the restriction change

Keep in mind the counter-intuitive nature. Contributions tend to make a restriction less likely to be removed

If manipulating the presumed AFTAP, consider fiduciary issues

82



Suggestions for administrative procedures - continued

The presumed AFTAP calculations will not take place if the current year AFTAP or a range AFTAP exists

Doing a current year AFTAP exactly at BOY will be difficult if not impossible – but a range AFTAP is doable

Difficulty of “providing” the AFTAP on New Year’s Day for calendar year plans

Cutting off presumed AFTAP calcs on 1st day of fourth month by issuing range AFTAP much more viable

83



Amendment restrictions

Same concern regarding inability to know actual BOY assets at BOY or when amendment is effective

But this issue is much more relevant for amendments –much greater chance that inability to know assets will make it unable to know if amendment is effective

Can avoid by simply not amending before have BOY assets, but what about COLAs ?

Also often need BOY FT also to calculate amendment change in FT. So need both BOY assets and FT to do presumed AFTAP calcs – exactly what is needed to do the current year AFTAP

No easy solution for amendments

84



Material modifications due to presumption

For actual AFTAP, the certified AFTAP itself sets the assumed plan operation with respect to distributions, amendments and accruals regardless of whether any action was taken in plan operation

For presumed AFTAP, the calculations happen magically on their own – without certification

85



Material modifications due to presumption

In the absence of actual real administrative actions, reasonable to assume plan operation theoretically was what it should have been based on presumed AFTAP, whether we have or even could know it when the restriction change happens

A possible material modification risking qualification should only occur if a real action was taken and later determined to not be consistent with presumed AFTAP

86



87

Range Certification

Range Certification

If a final certification is provided during the year, an initial ”range” certification is allowed

Final certification originally required by 9/30

Certifies that the plan is

Less than 60% (new in final regs)

Between 60 and 80%

Between 80 and 100% or

100% or greater



88

Range Certification

Allows a certification before all T’s are crossed

If range certification is materially wrong and, as a result, the plan did not apply restrictions which should have applied, the plan would be treated as failing 401(a)(29) which is a qualification requirement



89

Range Certification

If range certification is materially wrong and, as a result, the plan applied restrictions which should not have applied, the plan would be treated as failing to operate in accordance with its terms, which is a qualification requirement

Note that this is based on the theoretical restrictions which would have applied whether or not any actual relevant event occurred. So, if the range AFTAP was “over 80%” and final AFTAP is 75%, there is an issue even if no participant was due to receive a distribution.



90

Range Certification

Range Certification- Final regs

Final certification confirming range certification must be made by the end of the plan year

If final certification not timely made, plan deemed to be less than 60% funded retro to first day of 10th month

Proposed regs had implied that if the final AFTAP was not certified timely, the range certification was retroactively invalid from its inception



91

Range Certification

Range Certification-

Plan’s AFTAP treated as being at the bottom end of the certified range

A range certification must take into account all amendments adopted prior to the range certification

The range certification cannot be used to allow an amendment or UCEB to go into effect

Simplifies range certification maintenance

Is there an exception for a range certification of 100% or over and, if so, how to measure?



92

Range Certification

EXAMPLE- Its April 2nd

Actuary is certain that a plan is between 90% and 95% funded

Proposed amendment would decrease AFTAP by roughly 4%

Prior year certified AFTAP was 85%

Deemed AFTAP is 75% so amendment cannot go into effect without a current year certification

Can actuary do a range certification to allow the amendment to take effect??



93

Range Certification

ANSWER: NO

The only range certification that the actuary can do is to certify that the plan is between 80% and 100% before the amendment

The plan is deemed to be 80% funded as a result of the Range Certification

As a result the amendment would force the plan below 80%

Only way for amendment to go into effect is if a 436(f) contribution is made equal to 80% of the increase in FT attributable to the amendment

Or for a final certification to be made



Range certification requirements

A range certification is not required to include the specific information on assets, FT and balance that is required for a normal AFTAP

May the expectation of the final AFTAP used by the actuary in justifying the range AFTAP include an expectation of future contributions?

If not, how would this rule be enforceable without any evidence of estimated assets used? Could a “mistake” in misestimating FT or assets on range be offset by future contribution?

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EOY Valuations

No formal guidance on end of year valuations

Law and regs not even clear on how to apply segment rates

Law says first segment applies for five years from first day of plan year

Proposed regs said 5 years from val date

Final regs reserved

Everyone uses the proposed reg

AFTAP issues …EOY val can’t be done by 4/1

Some guidance in 2008-21 and 2008-73



Advanced Actuarial Conference Workshop 4: Advanced AFTAP ... 02AdvancedA… · COB = $50,000 AFTAP...

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