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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

CCH® PENSION AND BENEFITS — 1/16/08

IRS proposes rules on measurement of plan assets and liabilities under PPA

The IRS has released proposed regulations on the measurement of plan assets and benefit liabilities for purposes of the new funding rules for single-employer defined benefit plans under Code Sec. 430 , enacted under the Pension Protection Act of 2006 (PPA; P.L. 109-280).

The proposed regulations are generally applicable to plan years beginning January 1, 2009. However, for plan years beginning in 2008, plans are permitted to rely on the proposed regulations for purposes of satisfying the requirements of Code Sec. 430.

CCH Note: The IRS notes that this guidance is the third in a series of proposed rules following the May 29, 2007 release of proposed regulations relating to the mortality tables used to determine liabilities (see CCH Pension Plan Guide 20,261Y) and the August 31, 2007 release of proposed regulations relating to benefit restrictions for underfunded single-employer plans (see CCH Pension Plan Guide 20,262D).

Determining funding target and target normal cost

The proposed regulations provide rules for determining the funding target and the target normal cost, for plans that are not in at-risk status. Under the rules, the funding target would be the present value of all benefits that have been accrued or earned under the plan as of the first day of the plan year. The target normal cost for the plan year is the present value of all benefits that accrue or are earned under the plan during the plan year. In making this determination, future benefits to be paid from the plan must be allocated among the prior plan year, the current plan year, and future years. The rules explain how to calculate the amount to be taken into account in the funding target under circumstances where the amount of a benefit that is expected to be paid: (a) is a function of the accrued benefit at the time the benefit is expected to be paid; (b) is not a function of the accrued benefit at the time the benefit is expected to be paid, but is a function of the participant’s service at that time; or (c) is neither.

Plan administrative expenses paid from plan assets for a plan year are not taken into account in determining a plan’s target normal cost and funding target for that plan year. Generally, a plan must reflect the liability for benefits that are funded through insurance contracts held by the plan in the plan’s funding target and target normal cost, and must include the value of the corresponding insurance contracts in plan assets.

The proposed regulations provide that, once the actuarial assumptions and a funding method for a plan year are established, they are not permitted to be changed for that plan year. Both should be established not later than the due date for filing the Form 5500. Under the proposed regulations, the actuarial valuation must take into account the probability that future benefits will be paid in optional forms of benefit under the plan determined on the basis of the plan’s experience and other relevant assumptions.

The proposed regulations would provide that any reasonable technique can be used to determine the present value of the benefits expected to be paid during a plan year, based on the interest rates and mortality assumptions applicable for the plan year. Large changes in actuarial assumptions, such as those which decrease a plan’s funding shortfall by $50 million or more, would require approval of the IRS Commissioner.

Valuation date and value of plan assets

Under the proposed regulations, a plan’s valuation date, for plans other than small plans (defined for this purpose as plans with 100 or more participants within the employer’s controlled group) is the first day of the plan year. The proposed regulations require assets to be valued either at their fair market value on the valuation date, or upon an average of the fair market value on the valuation date and earlier determination dates (typically the two immediately preceding valuation dates, adjusted for asset and liability differences from the current valuation date). The proposed rules have provisions intended to keep employers and plans neutral regarding the timing of contributions that are paid after the end of the plan year. Similar to the pre-PPA rules, the proposed regulations require that current year contributions made before the valuation date must be subtracted from plan assets when determining their actuarial value.

Interest rates

The proposed regulations specify the interest rates to be used when determining present value and other calculations under Code Sec. 430. For the month that includes the valuation date, the rates are generally based on the 24-month moving averages of 3 separate segment rates, based on portions of the corporate bond yield curve. For existing plans, a transition rule applies for 2008 and 2009 under which these segment rates are blended with the long-term corporate bond rate that applies under pre-PPA law.

The monthly corporate bond yield curve is based on yields for that month on investment grade corporate bonds with varying maturities that are in the top three quality levels available.

The proposed regulations reflect the special 10-year amortization rate available to airlines under the PPA, which may be used in determining their plans’ funding targets. The rules also describe several alternative interest rates which sponsors may elect to use in place of the segment rates, subject to the consent of the IRS.

Under the proposed regulations, the interest rates used to determine the amount of shortfall amortization installments and waiver amortization installments are determined based on the dates those installments are assumed to be paid, using the same timing rules that apply for purposes of determining the target normal cost.

Plans in at-risk status

Significantly underfunded plans, referred to as “at-risk,” have special rules for determining funding targets. In calculating the funding target attainment percentage (FTAP) for such plans, the proposed regulations define the FTAP as the value of plan assets for the plan year after subtraction of the prefunding balance and the funding standard carryover balance, divided by the at-risk funding target of the plan for the plan year. In general, the proposed regulations would provide that the at-risk funding target and the at-risk target normal cost of the plan for the plan year are generally determined in the same manner as for plans not in at-risk status but using special actuarial assumptions, defined within the proposed rules.

If a plan has been in at-risk status for less than five consecutive years, the plan’s funding target for the plan year is determined as a blend of the funding target determined as if the plan were not in at-risk status and the funding target determined as if the plan had been in at-risk status for each of the previous five plan years.

The at-risk rules do not apply to small plans, defined for this purpose as plans with 500 or fewer participants within the employer’s controlled group during the preceding plan year.

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