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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.
In advance of pending regulations under Code Secs. 430 and 436, the IRS has released guidance clarifying the interest rates that may be used by actuaries in issuing the certified adjusted funding target attainment percentage (AFTAP) for 2009. According to the IRS, the final rules will, effective for plan years beginning on or after January 1, 2010, authorize automatic approval of new interest rates for the first plan year beginning in 2010, but will not allow for the use of a full yield curve with a lookback month.
Interest rate assumptions
The determination of present value and other funding computations is made on the basis of reasonable actuarial assumptions and methods that take into account the experience of the plan and offer an actuary's best estimate of anticipated experience under the plan. The interest rate used in determining the present value of benefits included in the target normal cost and the funding target for the plan is based on the performance of corporate bonds as reflected in a segmented yield curve that reflects the age of an employer's work force.
The yield curve essentially consists of different interest rates applicable to benefits payable in three different time periods (i.e., segments). Each segment rate will be a single interest rate determined monthly by the Treasury on the basis of the corporate bond yield curve. The applicable interest rate will be determined by the segment in which the expected payment due date falls, ranging from 0-5 years, 5-20 years, or over 20 years. Generally, employers with an older work force will be required to use a short-term corporate bond rate, resulting in higher contributions.
Because interest rates that will be applicable for 2010 may influence the choices plan sponsors make for 2009 plan years, questions have arisen as to whether sponsors may automatically change the rates without first securing IRS approval. Plan sponsors, the IRS acknowledges, may wish to use the full yield curve with an applicable lookback for the 2009 plan year, while also retaining the right to automatically change the segment rates for the 2009 plan year.
IRS relief allowed for use of spot interest rates. In March 2009, the IRS issued relief that authorized an employer maintaining a calendar year plan with a January 1, 2009 valuation date to use the monthly yield curve for January 2009 or any one of the four months immediately preceding January 2009 (see CCH Pension Plan Guide Newsletter 1781, April 13, 2009). As a result of the relief, employers electing the monthly rate instead of the 24-month smoothing rate, were not required, for 2009, to use the December 2008 corporate bond yield curve, but could use the higher spot rate for September, October, or November 2008. Being able to use the higher interest rates was anticipated to result in a reduced pension funding obligation for 2009.
Effect of relief on benefit limits under Code Sec. 436
Plans subject to a benefit limitation under Code Sec. 436 for the preceding plan year will be presumed to be subject to the limit in the current year until the plan actuary certifies the actual adjusted funding target attainment percentage for the current year. A presumption of underfunding also applies to plans that were not subject to benefit limits, but that had an adjusted funding target attainment percentage for the prior plan year that was not more than 10 percentage points greater than the benefit limit threshold (e.g., 60% for lump-sum distributions or shut-down benefits). Under the rule, unless the plan's enrolled actuary certifies the actual adjusted funding target attainment percentage of the plan for the current plan year (as determined under Code Sec. 430) by the first day of the fourth month of the current plan year (April 1 for calendar year plans), the plan's adjusted funding target attainment percentage will be presumed, as of that day, to be 10 percentage points less than the adjusted funding target attainment percentage for the preceding plan year. The first day of the fourth month of the current plan year will be deemed to be the valuation date of the plan for the current plan year for purposes of applying the benefit limitation. Thus, the benefit limitation will apply beginning on that date until the plan's actuary certifies the plan's adjusted funding target attainment percentage.
In response to criticisms that variations in bond rates during the months prior to January 1 could result in deviations in plan liabilities that could affect the benefit limits under Code Sec. 436, the March 2009 relief provided that the AFTAP certification for calendar year plans that elect to use the corporate yield curve, need not be based on the December corporate bond yield curve. The AFTAP certification could be based, rather, on the yield curve from one of the four preceding months.
Final regulations effective in 2010
In the most recent relief, the IRS has indicated that the final regulations, effective for plan years beginning on or after January 1, 2010, will:
(1) authorize automatic approval for a new choice of interest rates for the first plan year beginning in 2010 (regardless of the choices that were made for earlier plan years); and
(2) not allow for the use of the full yield curve with a lookback month.
SOURCE: IRS Employee Plan News, Special Edition, September 25, 2009.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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