1/11/2016 1 1 Workshop 13 End Of Year Valuation Issues G. Neff McGhie, III, MSPA Sierra Pension Services, Inc. Lynn M. Young, MSPA Pinnacle Plan Design, LLC January 22, 2016 2 Valuation Date • The valuation date of a plan for any plan year is the first day of the plan year, with an exception for small plans. • If, on each day during the preceding plan year, a plan had 100 or fewer participants (including active and inactive participants and all other individuals entitled to future benefits), the plan may designate any day during the plan year as its valuation date for such plan year and succeeding plan years. • IRC 430(g)(2) 3
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Workshop 13End Of Year
Valuation IssuesG. Neff McGhie, III, MSPA
Sierra Pension Services, Inc.
Lynn M. Young, MSPAPinnacle Plan Design, LLC
January 22, 2016
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Valuation Date
• The valuation date of a plan for any plan year is the first day of the plan year, with an exception for small plans.
• If, on each day during the preceding plan year, a plan had 100 or fewer participants (including active and inactive participants and all other individuals entitled to future benefits), the plan may designate any day during the plan year as its valuation date for such plan year and succeeding plan years.
• IRC 430(g)(2)
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Valuation Date (cont’d)
• All defined benefit plans which are single-employer plans and are maintained by the same employer (or any member of such employer’s controlled group) shall be treated as 1 plan, but only participants with respect to such employer or member shall be taken into account.
• In the first plan year, this exception is determined by taking into account the number of participants that the plan is reasonably expected to have on each day during the first plan year.
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Approval to Change Valuation Date
• The Section 430 final regulations provided for automatic approval for 2008, 2009, and 2010
• In addition, the regulations provide that a change in a plan’s valuation date or asset valuation method for the first plan year to which section 430 applies to determine the plan’s minimum required contribution (even if that plan year begins after December 31, 2010) that satisfies the requirements of the regulations is automatically approved and does not require prior approval.
• Reg. 1.430(g)-1(f)(3)
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Automatic Approval to Change FM?
• Currently there is no automatic approval to change the valuation date from BOY to EOY.
• Only in the event of plan termination does a sponsor have automatic approval to change from EOY to another date in plan year.
• If you want/need to change the valuation date, then you have to apply for this change with the IRS.
• The user fee for this is $10,000! (increased effective Feb 1, 2016 from $4,000 in 2015)– Rev Proc 2016-8
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Approval to Change to BOY if no longer a Small Plan
• If a plan that was using a valuation date that was not the first day of the plan year is no longer eligible to use that date because the plan is no longer a small plan, the required change of the valuation date to the first day of the plan year is treated as automatically approved and no prior approval of the Commissioner is necessary.
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The Basics
• The determination of the funding target, target normal cost, and asset value of a plan for a plan year is made as of the valuation date of the plan for that plan year.
• IRC 430(g)(1)
• Reg. 1.430(g)-1(b)(1)
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Minimum Required Contribution
• If Assets < Funding Target:• Sum of present value of benefits accruing during year
(called the Target Normal Cost) and amortization installment(s) for any shortfall (called the Shortfall Amortization Installment).
• If Assets > Funding Target:• Target Normal Cost less Excess Assets
• IRC 430(a)
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Assets• Contributions made before the Valuation Date
– The contribution (and any interest at the effective interest rate for the year on the contribution for the period between the contribution date and the valuation date) must be subtracted from plan assets in determining the value of plan assets as of the valuation date.
• The assets reported on Line 2a of the Sch SB will also exclude current year contributions made before Val date.
– According to final regulations, if the result of this subtraction is less than zero, then the assets as of the valuation date are equal to zero. Reg. 1.430(g)-1(d)(2)
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What is the Target Normal Cost?
• Cost of benefits accruing during the year.
– This is regardless of valuation date, but could differ in amount based on this date.
• Basically a unit credit cost method.
• IRC 430(b)
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What are the benefits accruing during the year?
• With BOY valuation:– Benefit that accrues is estimated based on BOY
data
• With EOY Valuation:– Benefit that accrues is the actual amount
• With Mid-year Valuation:– Benefit is part actual and part estimated.
• Reg. 1.430(d)-1(b)(ii)
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Funding Target
• This is the present value of benefits accrued as of the first day of the plan year.
– Valuation date is immaterial to determining accrued benefits for this purpose
– So you use accrued benefits as of the first day of the year and determine their present value as of the valuation date
– IRC 430(d)
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Segment Interest rates• Pre and post retirement interest rates selected by the
actuary are replaced by a new prescribed three tiered “segment rate”.
• This three tiered segment rate varies depending on when the liability will occur.
• There is one rate for payments made during the next 5 years (AS MEASURED FROM THE VALUATION DATE), another for payments between 5 and 20 years, and a third for payments made over 20 years into the future.– IRC 430(h)(2)(B)(i)– Sec. 2003(d)(1) of HATFA changed the measurement from the valuation date– Special rule for plan years beginning prior to 1/1/14 to permit the use of the
measurement from the beginning of the plan year – Reg. 1.430(h)(2)-1(b)(2)(i); 1.430(h)(2)-1(b)(2)(ii)
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Segment Rates (cont’d)
• The valuation date controls the determination of the segment rates used.
– A BOY calendar valuation date by default uses the segment rates for January, while an EOY calendar valuation date by default uses December.
– Sponsor may elect alternative month that is one of the 4 months that precede the month that includes the valuation date of the plan for the plan year.
– IRC 430(h)(2)(E)
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Segment Rates with MAP-21• All rates for a plan year that begin in that
calendar year subject to same limiting range of rates
• The valuation date becomes (mostly) irrelevant
• The lookback month becomes (mostly) irrelevant
• IRC §430(h)(2)(C)(iv) added by MAP-21
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MAP-21 Rates example• The rates determined for September 30th of a calendar year apply to all
plan years that begin in the following calendar year
– The 9/30/14 MAP-21 rates apply to all plan years beginning in 2015
• Example 1: Plan Year is calendar year
– For the 12/31/15 valuation the plan uses the segment rates for November 2015 (one-month lookback)
– Those rates are constrained by the 90% to 110% corridor around the 25-year average of rates at 9/30/14
– Unadjusted: 1.36%/3.99%/5.02%
– Adjusted: 4.72%/6.11%/6.81% (lower end of range since each of the unadjusted rates falls below the MAP-21 range)
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MAP-21 Rates example 2
• Example 2: Plan Year is 7/1/15 to 6/30/16– Plan uses an EOY valuation date with no lookback
– Those rates are constrained by the SAME 90% to 110% corridor around the 25-year average of rates at 9/30/14
– Adjusted rates: 4.72%/6.11%/6.81% (lower end of range still)
– This is true even though the valuation date is nearly two years after the 9/30/14 determination date for the rates
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A Twist with Contributions
• Contributions are adjusted from deposit date to valuation date at “Effective Rate”– IRC 430(j)(2)
– Reg. 1.430(j)-1(b)(4)(i)
• Effective Rate = The single interest rate that would produce the same Funding Target as the Segment Rates– 430(h)(2)(A)
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A Twist with Contributions• Example with BOY Valuation Date. The plan
sponsor makes a contribution for the 2014 plan year on September 15, 2015 of $100,000. The minimum required contribution is $96,000 as of 1/1/2014. The effective interest rate is 6 percent. The amount of the contribution that is actually credited towards the minimum required contribution is $100,000/(1.06)^(622/365)=$90,547. This contribution is not sufficient to meet the minimum funding requirements for 2014.
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Examples with EOY Valuation• Example with EOY Valuation Date. The plan
sponsor makes a contribution for the 2014 plan year on September 15, 2015 of $100,000. The minimum required contribution is $98,000 as of 12/31/2014. The effective interest rate is 6 percent. The amount of the contribution that is actually credited towards the minimum required contribution is $100,000/(1.06)^(258/365)=$95,965. This contribution is not sufficient to meet the minimum funding requirements for 2014.
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Examples with EOY Valuation
• Example with EOY Valuation Date. The plan sponsor makes a contribution for the 2014 plan year on September 15, 2014 of $97,000. The minimum required contribution is $98,000 as of 12/31/2014. The effective interest rate is 6 percent. The amount of the contribution that is actually credited towards the minimum required contribution is $97,000*(1.06)^(107/365)=$98,671. This contribution IS sufficient to meet the minimum funding requirements for 2014.
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Carry-over and Prefunding Balances
• Balances are calculated as of the beginning of the plan year, even for EOY valuations for certain purposes, and then accumulated at the plan’s actual rate of return.
– Accumulate from BOY to val date at EIR
– Then use some of balance
– Then discount back to BOY at EIR
– Then accumulate to next BOY at actual ROR
– Reg. 1.430(f)-1(b)(3); 1.430(f)-1(b)(4)
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Example adapted from Regs:
• Facts:– 2009 Calendar Plan Year
– Valuation date = December 31, 2009
– COB @ 1/1/2009 = $50,000
– 2009 actual ROR = 10%
– 2009 EIR = 5%
– 2009 MRC = $200,000 (as of 12/31/2009)
– Contribution of $190,000 deposited on 12/31/2009
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Example cont’d:
– Increase COB from BOY to val date at EIR:
• $50,000 x 1.05^(12/12) = $52,500
– Sponsor chooses to apply part of COB to MRC:
• $10,000 ($200,000 MRC - $190,000 contribution)
• Amt of COB remaining at December 31, 2009:
$52,500 - $10,000 = $42,500
– Discount COB to BOY at EIR:
• $42,500 / 1.05^(12/12) = $40,476
– Accumulate COB from 1/1/2009 to 1/1/2010:
• $40,476 x 1.10 = $44,524
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Schedule SB issues• There are special ways the balances must be
reported and accumulated for the Sch SB
• According to the SB, these balances are reported solely as of the BOY (regardless of valuation date)
– Line 7 – Balance @ beginning of prior year• Prior year line 13
– Line 8 – Reporting portion used in prior year• For EOY valuation, use line 35 amount from prior year
SB, discounted to the first day of the prior year using the prior year’s effective interest rate.– Exception for applying late quarterly contributions
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Sch SB Issues Cont’d
• Line 10: Enter prior year’s rate of return
– This is used to bring forward the balances as of the beginning of the prior year to the beginning of current year at actual rate of return
• Line 11(a): Enter line 38a from prior year’s Sch SB, amount available to increase PFB
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Sch SB Issues Cont’d
• Line 11(b): Since the valuation date is EOY, this value (EIR times 11a) is zero as there is nothing to credit from val date to EOY.– Where valuation date not first day of Plan Year
instructions say to report interest from prior year valuation date to end of prior year
– Exception for the “Replenishment Rule”: If sponsor applied PFB/COB in prior year and this created PFB, then must apply actual ROR to this amount. (§1.430(f)-1(b)(3)(iii))
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Sch SB Issues Cont’d
• Line 12: This is the current year reduction in COB/PFB elected (or deemed to be elected) by the plan sponsor.
– For EOY valuations, discount this value to the first day of the plan year using the current EIR.
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Sch SB Issues Cont’d
• Line 13: Final balance as of the BOY, which for an EOY valuation is:– Line 13 from prior year’s SB (final balance at BOY), less
– Line 35 from prior year’s SB (amount used last year discounted to first day of year at prior year’s EIR),
– This balance accumulated to current BOY at prior year’s ROR, plus
– Amount based on excess contributions in Line 38a from prior year’s SB (amount to increase PFB), less
– Current reductions to the balances, reduced to BOY by current EIR
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Sch SB Issues Cont’d
• Line 35: Amount used to offset minimum funding requirement.
– Since the balances reported on Line 13 are as of the BOY, but the funding requirement is reported as of the valuation date, the balance used must be accumulated to valuation date using current year EIR
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Example: 2014 Schedule SB(Both 2013 and 2014 are EOY vals)
• Line 7: 2013 BOY PFB balance = $10,000
• Line 8: Amount used in 2009, as reported on line 35 of 2013 Sch SB = $5,000– Discounted to 2013 BOY using 2013 EIR of 6% = $4,717
• Line 9: $10,000 - $4,717 = $5,283
• Line 10: Earnings to current (2014) BOY using prior yr ROR of 8% = $423– ($5,283 x .08 = $423)
• Line 11(a): 2013 Sch SB line 38 = $15,000– Since we used $5,000 of PFB and created $15,000 of PFB,
• Line 35: Sponsor elects to use $15,000 to reduce funding, possible? Yes (presuming prior year funding ratio 80%).
– $14,827 x 1.065 = $15,791 is max available at EOY
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Ex: change of valuation date from 2009 EOY to 2010 BOY
• Line 7: 2009 BOY PFB balance = $10,000
• Line 8: Amount used in 2009, as reported on line 35 of 2009 Sch SB = $5,000
– Discounted to 2009 BOY using 2009 EIR of 6% = $4,717
• Line 9: $10,000 - $4,717 = $5,283
• Line 10: Earnings to current (2010) BOY using prior yr ROR of 8% = $423
– ($5,283 x .08 = $423)
• Line 11(a): 2009 Sch SB line 38 = $15,000
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Ex: change of valuation date from 2009 EOY to 2010 BOY
• Line 11(b): $94
– Interest from prior year val date to end of prior year plus use of replenishment rule again
• Line 11(c): $15,094 (11(a) + 11(b) – avail to add to PFB)
• Line 11(d) $15,094 (portion of 11(c) added to PFB)
• Line 12: Assume 2010 deemed reduction of $7,000
– Not discounted as current year (2010) val date is BOY• Line 13: $5,283 + $423 + $15,094 + $0 – $7,000 = $13,800
• Line 35: Sponsor elects to use $15,000 to reduce funding, possible? No.
– Since BOY val $13,800 is amount available at val date
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Sch SB FTAP
• According to the 2015 Sch SB instructions, for end of year vals the FTAP is equal to:
– Actuarial value of assets at EOY on line 2(b), less
– Credit and pre-funding balances on line 13, increased at EIR for current year to EOY
• Since these are reported as of BOY, they must be adjusted to EOY
– Divided by FT – line 3(d)(2) - as of EOY
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Sch SB AFTAP• According to the 2015 instructions to the Sch SB,
the AFTAP is equal to the FTAP, with the following modifications:– The assets and FT are both increased by the aggregate
amount of annuity purchases for NHCE’s for the prior two plan years, and
– In the case of EOY val, the final AFTAP is adjusted for contributions for the current plan year and “reflecting other adjustments as described in applicable guidance”
– According to the instructions (and verbal IRS comments), this AFTAP is used for 436 purposes for the following plan year.
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Sch SB AFTAP
– So effectively for EOY val, for purposes of line 15:• As one possible reasonable interpretation in the absence of
guidance
– Funding Target = FT plus Target Normal Cost
– Assets = EOY assets plus discounted receivables
– Credit and Pre-funding balances adjusted to EOY @ current ROR and also adjusted to add current year excess contributions to the PFB
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Quarterly Contributions
• In general, quarterly contributions are due for plans that had funding shortfall in prior year.
– IRC 430(j)(3)(A)
– Required installment = ¼ of required annual payment (RAP)
– RAP lesser of • 90% current MRC (ignore use of PFB/CB); or
• 100% prior year MRC (ignore waiver)– N/A if prior year short year
– 412 minimum for pre effective date year
• IRC 430(j)(3)(D)
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Quarterly Contributions
• For BOY valuations:
– Failure to make quarterly payment results in increased interest when contribution is discounted to valuation date
• EIR plus 5% from actual date of contribution back to quarterly due date on underpayment (Required installment less timely contribution)
• Contributions credited to earliest unpaid installment
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Quarterly Contributions for EOY• Final regulations provide guidance regarding EOY
valuations.• From the preamble to the Final Regulations, any late
quarterly installment (and any late election to use the funding balances to satiis discounted for interest from the date of the late contribution or election to the due date for the installment using an interest rate equal to the plan’s effective rate under section 430(h)(2)(A) for the plan year plus 5 percentage points. The discounted amount is then treated as if it were contributed or elected on the due date and further adjusted for interest from the due date to the valuation date.
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Quarterly Contributions
• Mathematically equivalent to the approach suggested in the preamble to the proposed regulations using compound interest.
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Quarterly Contributions– If a quarterly installment is due before the valuation date
for the plan year, the minimum required contribution for the plan year would be increased by an additional amount if that quarterly installment is not paid by the due date. This additional amount would be determined by applying interest at an annual rate of 5% to the underpayment of the required installment for the period of time between the due date for the required installment and the earlier of the date of payment or the valuation date.
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Quarterly Contributions
• Example 15 from Final Regulations
• Calendar year plan and a val date of Dec 31
• Required quarterly installments for the 2017 plan year are $30,000
• Effective interest rate for 2017 is 5.90%
• First contribution for the 2017 plan year is made on May 15, 2017 for $40,000. The remaining amount of each required installment is paid on the date it is due.
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Quarterly Contributions
• $30,000 of the first payment is allocated to the first quarterly installment even though it is paid after April 15, 2017.
• Remaining $10,000 is allocated to the installment due July 15, 2017, but it is adjusted for interest.– ($10,000 * (1.059^(2/12))= $10,096. The remaining
installment due for July 15, 2017 is $19,904.
– Remaining installments of $30,000 are contributed on October 15, 2017 and January 15, 2018.
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Quarterly Contributions
• Total amount credited against the minimum required contribution is $122,062 as of December 31, 2017– Portion of the May 15, 2017 contribution allocated to the
April 15, 2017 quarterly installment• $30,000/(1.1090^(1/12))*1.059^(8.5/12)=$30,975
– Remaining $10,000 of the May 15, 2017 contribution.• $10,000*(1.059^(7.5/12))=$10,365
• The amount deducted from valuation assets as of December 31, 2017 for contributions made before the valuation date is determined without regard to the special interest adjustment for the late quarterly installment.
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Amortization Bases
• Funding shortfall is difference between funding target & adjusted assets at valuation date.
– IRC 430(c)(4)
• Shortfall Amortization Base for a plan year is the funding shortfall less the present value of shortfall amortization installments for prior bases
– IRC 430(c)(3)
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Shortfall Amortization Base
• No new base established if assets > FT, where assets reduced only by PFB and only if PFB being used in current year to reduce MRC. – IRC 430(c)(5)
• Base recognizes any shortfall for any reason.
• Base is amortized over 7 years using segment rates from valuation date– IRC 430(c)(2)
• Bases eliminated if no funding shortfall– IRC 430(c)(6)
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Example of BOY vs EOY for 2008
• Facts:– 2008 Calendar Year Plan
– Segment rates as of October:
• 2007: 5.68, 5.87, 6.05
• 2008: 5.79, 6.15, 6.29
– Benefit formula: $1000 per year of participation
– Sole Participant is age 64, NRA is 65, with 10 years of past participation
– Assets as of 1/1/2008: $950,000
– Assets as of 12/31/2008: $997,500
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Example
• BOY Results (calculations estimated):
– 1/1/2008 Funding Target based on $10,000/mo accrued benefit: $1,231,297
– 1/1/2008 shortfall: $281,297
• 7-year amortization: $47,255
– 1/1/2008 TNC based on $1,000 accrual for year: $123,129
– MRC as of 1/1/2008: $170,384 ($123,129 + $47,255)
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Example• EOY Results:
– 12/31/2008 Funding Target based on $10,000/mo accrued benefit at BOY but valued at EOY: $1,279,077
– 12/31/2008 TNC based on $1,000 accrual for year: $127,908
– MRC as of 12/31/2008: $217,552• This is a 24% increase due to asset loss, but would recommend a much
larger contribution to fully fund plan
• But what if employer can’t make the contribution due to lower business income?
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Maximum Deductible Amounts
• Is there any substantive difference between BOY valuations and EOY?– It doesn’t look like it since the FT is still based on
accrued benefits as of the BOY
• So this isn’t an answer to the 1st year max problem.
– Though if final regulations do not provide for interest to year-end (as under current reg. 1.404(a)-14(f)(3)) then EOY vals will have additional year of interest in maximum (and minimum)
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PBGC issues with EOY valuation
• Determination of Unfunded Vested Benefits (UVBs):– UVBs under PPA 2006 are based on a plan’s funding
target and the market value of its assets as of the valuation date. However, Small Plans are subject to a Lookback Rule, under which the Variable-rate Premium for the Premium Payment Year is based on UVBs for the Plan Year preceding the Premium Payment Year – for example, under the Lookback Rule, the 2015 Variable-rate premium is based on UVBs for 2014.
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PBGC Issues
UVBs Continued:
• For plans using the Lookback Rule, the UVB Valuation Date is the valuation date used to determine the minimum required contribution for the Lookback Year.
• The Premium Funding Target is the liability measure for the UVB calculation. It is determined the same way the Funding Target is determined, except only vested benefits are included.
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PBGC Issues
• Participant Count Date:
– This is the same for BOY and EOY valuations, it is the last day of the prior plan year.
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PBGC Issues
• What segment rates do you use?
– The interest rates used in the determination of the UVBs is the same whether the valuation date is the first or last day of the plan year.
– The interest rates to be used are the special spot rates for the month preceding the month in which the premium payment year begins.
– If using the Alternative Method, then will use same funding segment rates as EOY valuation.
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PBGC Issues
• Assets:
– Market value of assets as of the valuation date, with contributions discounted to the valuation date in the same manner as funding valuation using the same EIR as in funding valuation.
• Prior year contributions are discounted to valuation date using effective interest rate
• Current year contributions and interest at the effective interest rate that are made prior to valuation date are not included in the asset value.
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PBGC Issues
• Premium Due Date:
– 15th day of the 10th full calendar month in the plan year. (Due date for the 5500 with extension)
– Small Plans that have an end of year valuation date must use the Lookback Rule as the due date of the filing is before the valuation date.
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Plan Termination• For purposes of Section 430, the plan is treated
as having a short plan year that ends on the termination date.
• If the plan terminates before the valuation date, then the valuation date for the plan year must be changed so that it falls within the short plan year.– Reg 1.430(g)-1(b)(2)(i)
• There is Automatic Approval for a change in the valuation date that is required by section 430.– Reg 1.430(g)-1(b)(2)(iv)
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Why use EOY valuation?
• Possible reasons include:
– Simplification if doing a general tested plan to avoid running valuation twice in year
– Sole proprietors that don’t want contributions in excess of earned income
• In this case, suggest tying accrual to current comp rather than average in combination with EOY val
– You’ll know better by year end any amendments that have been made to alter valuation.
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Why use EOY valuation?
• Possible reasons include:
– Accruals being funded are based on actual data versus estimated data
– Current year hires included in cost
• If looking for maximum deduction
• Reg. 1.430(d)-1(e)
– Fewer 412(d)(2) elections
• Reg. 1.430(d)-1(d)(1)
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Why not use EOY valuation?
• Rules are established for BOY and we don’t know all the rules for EOY yet.
• Current year hires not included in cost • If looking for minimum contribution
• Reg. 1.430(d)-1(e)
• More 412(d)(2) elections
– Flexibility to ignore amendments made during year
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We still need guidance
• There are still a lot of issues left that we need guidance for:
– AFTAPs
– Adjustments to EOY FT for distributions
– Adjustments to EOY FT for partially vested terminations
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