Note - Any federal tax advice contained in this transcript is intended to apply to the specific situation described and should not be considered official guidance independent of the presentation. The tax advice and statements contained herein should not be relied upon for retirement planning purposes without first consulting a tax or retirement planning professional. This transcript has been edited for technical accuracy and may differ slightly from the audio recording of the MAP-21 phone forum. This information is current as of September 27, 2012. Since changes may have occurred, no guarantees are made concerning the technical accuracy after that date.
JS: Thank you, Emily, and good morning everyone. As Emily said, I'm John Schmidt and I'm the Staff Assistant from IRS Employee Plans Customer Education and Outreach. And I'd like to welcome you to our MAP-21 phone forum. Today we will be hearing from Tony Montanaro and Michael Spaid, both actuaries with Employee Plans; Amy Viener, an actuary with PBGC; and Linda Marshall, Senior Counsel with the Office of the Associate Chief Counsel, Tax Exempt and Government Entities. They'll be discussing the Moving Ahead for Progress in the 21st Century Act, known as MAP-21, and the related guidance, IRS Notices 2012-55 and 2012-61. Before we start, I'd like to point out a few administrative items. Everyone registered for this forum will receive a certificate of completion by email approximately one week after today's forum. You must attend the entire live forum to receive that certificate. Enrolled agents, enrolled retirement plan agents, and retold – and, and enrolled actuaries are entitled to one continuing education credit for this session. Other types of tax professionals should consult their licensing organization to see if this session qualifies for continuing education credits. As with all our presentations, the comments expressed by our speakers should not be construed as formal guidance from the IRS.
While I have your attention, I would like to encourage you to check out our two free online electronic newsletters. If interested, go to your favorite search engine, type in irs.gov/retirement to bring up our landing page. Once there, scroll down and click on "newsletters". There you can subscribe to future editions and browse past issues of the Retirement News for Employers, our newsletter for plan sponsors and their advisors, and the Employee Plans News, which is directed at retirement plan professionals.
So without further delay I'd like to turn it over to our first speaker, Tony Montanaro.
TM: Thank you, John. This is Tony Montanaro, actuary with the Employee Plans. To get
right into the concept of the discussion, President Obama signed the transportation bill, Moving Ahead for Progress in the 21st Century, or MAP-21, on Friday, July 6, 2012.
Included in the bill was section 40211, titled Pension Funding Stabilization. This includes
changes both to the Internal Revenue Code and to ERISA. So as a form of
stabilization and having the effect of providing funding relief in the current
market climate, the law changes the interest rate arrangement under Sections 430(h)(2)(C) of the Internal Revenue Code. This is the code provision that defines the segment rates
based on the corporate bond yield curve. And, by the way, these are the 24-month average
segment rates prescribed for funding and associated uses, not the spot segment rates used
for other purposes such as 417(e) computations.
So the first, second, and third segment rates remain as noted in clauses i, ii, and iii of Section 430(h)(2)(C). But the statute provides a new clause iv, which creates limits on the segment rates. For a given plan year, the law requires that the affected segments must be within a certain percentage of the 25-year average segment rates. For 2012 plan years, that percentage is 10%. The 24-month average segments must not differ from the
25-year average segments by more than 10%. The size of this collar expands for later plan years, to eventually create a permissible corridor from 70% to 130% of the 25-year average by 2016. And the list for that is on slide five. So for each plan year, the applicable percentage is a percentage of the 25-year average for the 25-year period ending September 30th of the calendar year before the calendar year in which the plan year begins. So if a plan year is beginning in 2012, the pertinent 25-year average is for the period ending September 30th 2011.
We've been referring to these resulting values as the adjusted 24-month average segment rates, although some people have used other terms like stabilized segment rates. The new rules are effective for plan years beginning on or after January 1, 2012, but how it's effective for 2012 plan years is subject to quite a number of qualifiers, exceptions, and elections, which we'll get into later. Also, the adjusted segment rates are not applicable for all purposes that Section 430(h)(2) rates deal with, and we'll be talking about some of those differences in a few minutes. The adjustments for the 25-year average also does not apply for determining the funding target for plans that use the full yield curve under Section 430(h)(2)(D).
So the law requires a collar, based on a 25-year average, and then requires the Treasury and the IRS to publish the 25-year average segment rates. I believe it wasn't until Tuesday, July 10th, that I have received the first query asking, "Where are the new rates? We need these rates! When are you going to release them?" I would just like to know, what took you so long? A whole business day, Monday the 9th, went by without somebody jumping up and down on us for the delay, if you want to call it that. What made you go so easy on us, to give us a one day grace period? Well, whatever the reasons, thank you, I appreciate your forbearance. It was back to business as usual on July 10th, by the way. So the basic plan for the rate in the statute, the 25-year average, appears to be just like the monthly corporate bond yield curve rates that are computed under Section 430(h)(2), which we've been computing since 2007. However, the law does permit the secretary to prescribe so-called equivalent rates for any years in which the corporate bond yield curve segment rates are not available. So which ones would we issue? Full yield curve corporate bond yield curve segment rates based on 25-year averages, or equivalent rates? And that was a difficult question.
What we experienced was effectively a universal call from practitioners and plans, and plan sponsors, for a quick release of numbers, as early as possible, even if that meant relying on equivalent rates, with a heavy emphasis on the effects these numbers would have on decisions about contributions and elections being made in September and the AFTAPs being done by September 30th. We found that it would be literally impossible to get full standard yield curves done all the way back to 1984, and get them done by mid-September, much less by a date early enough for actuaries to compute needed contributions, and company executives to determine how they wanted to plan their business processes.
To give you an idea of what was involved, there's a mountain of data to collect, sift and organize to produce the full yield curves. Not all of that data is immediately ready to hand, and at the time we weren't even sure that all the data still exists. Along with that problem, there were potential challenges to insuring that the data we could get all has the same applicability throughout the entire period. For example, the yield curve uses a couple of important adjustments to reflect variations in quality between the highest three ratings available. What happens if one of the bond rating agencies changes its definition of the highest three qualities at some point? We also faced issues with some of the criteria for which bonds are included in the yield curve. One criterion is that each bond have a par amount outstanding of at least $250 million on the day that it's being used. Do we change that to a lower cutoff amount for earlier years? Should it be 150 million, or 100 million in 1986? If so, when are the dates for changing the cutoff in that period? All this work was not going to get done before September, so Treasury decided to work up equivalent rates for the period before October 2003, which is the point at which our existing spot segment rates start.
The Treasury Department experts investigated relationships between the existing spot segment rates and other forms of current corporate and Treasury bond information, with a particular emphasis on forms of current bond information, which were also forms of information existing back in 1984, and for which the data back then is available now. Some corporate bond indices are examples of that kind of information. The Treasury analysts were able to establish a model that uses the existing segment rates and constructed from 2003 to 2012 corporate bond indices and Treasury bond rates from that period, looking at spreads between them. The framework for the method was described in Notice 2012-55, which went out August 16th.
Using the data from October of 2003 forward on a monthly basis, they computed spreads between the spot segment rate and the Treasury spot rate averages, and for each of these they used Treasury spot rates that paralleled a portion of the maturity spectrum. So for the first segment, they used Treasuries with maturities from one to five years, and for the second segment Treasuries for maturities from six to 20 years, and so on. The other spreads were those between corporate bond entities and constant maturity Treasuries, or CMTs. There were two such spreads, one being the difference between Citigroup A index, and the seven year CMTs, the other being the difference between the Citigroup AA-AAA index, and the same seven year CMTs. So for each segment, they used data on these three spreads to run a least squares regression and come up with three coefficients that allowed us to approximate a relationship for the three variables and the known segment rates. They used that work and that data for the post-2003 period, to establish what they assumed that was also the relationship for the pre-2003 period. They took the known data for the period before October of 2003, and then the coefficients for the spreads, and used those to develop what should be the spreads between the Treasury spot rate averages and the segment rates pre-2003. And out of that falls the estimated values for the segment rates for that period.
So with this process, they determined for each month from October 1984 to September 2003, equivalent monthly spot segment rates. They already the spot rates going forward from that point, and that gave us our 25-year average segment rates issued in the notice. The first segment rate of 6.15, the second of 7.61, and the third of 8.35. The corridor allowable on these, the 25-year averages, is 90 to 110%, and that gave us the lower limit, being 5.45, 6.85 and 7.52 respectively. And those are the necessary numbers for plan years beginning in 2012.
So what about future plan years? Are equivalent rates going to be used for the 25-year average that ends September 30, 2012, or are we going to establish the full yield curve rate technique? We've been asked that a lot. We can confidently report the following: the decision has not been made. We don't know. The Treasury Department would prefer to use the current methodology, the standard full yield curve method, that we use each month. But they don't know if it's feasible yet. That determination won't be made for a while, a few weeks to a couple of months. If any of you has all the data that's needed to compute yield curves back to the 1980s, please come forward. We'd love to find that the data already is collected!
Another question being asked is, can we provide the intermediate values for the period before 2003? We have not provided those to anybody. Actually, I haven't seen them myself. We don't expect to release anything along those lines until we have a decision about whether the future 25-year average segment rates will be computed using the full standard yield curve method or the equivalent rate method. And that's as far as we have at this point. And from here, I'd like to turn it over to Mike Spaid.
MS: Thanks, Tony. I'm going to be touching on Notice 2012-61 mostly today. I'm going to probably take about 25 minutes or so before Amy speaks about PBGC issues. We've received several questions which we have compiled answers for and we will be touching on those at the end. If we don't get through all the Q&As they will be posted to the EP Phone Forum web site. So if we didn't get to your question, if you have submitted it, it will be answered. I want to say we're going through the Q&As in the order in which they were received. So the questions that were received just the last few days may not be touched upon today. Anything received today will not be answered on the phone; I haven't had a chance to look at those yet. But let's move forward and look at this Notice 2012-61. It was issued in September of this year, and this is the guidance people were looking for and anxiously awaiting to determine how do we take the interest rates that Tony had worked on and had just mentioned about, and how do they work, what special rules do we have. And for those of you following on the slides we're of course on slide 15.
We need to look at when the MAP-21 rates apply. They apply of course to the calculation of minimum required contribution under Section 430: target normal costs and funding target, calculation of the present value of remaining shortfall and waiver amortization, installments, shortfall waiver amortization installments, and of course also limitation on the assumed rate of return for asset smoothing as provided in 430(g). They don't apply in every situation, though. For instance, they don't apply for calculating – I'm sorry, I'm ahead of myself. They apply for the benefit restrictions under 436 as well, as one might think. They do also apply to the minimum required contributions for plans subject to Sections 104, 105 of PPA 2006. And this is something special; it's for determining the MAP-21 adjustments to third segment rates.
Where do they not apply? They do not apply for determining the maximum deductible amount under Section 404(o). It's interesting, though, and this is covered in one of the questions but I want to mention it now, that because MAP-21 specifically exempts 404(o) from the application of the special rates, there's no exemption currently for the combined plan limits under 404(a)(7), so at this point it appears that MAP-21 does apply for the combined plan limit under 404(a)(7). They don't apply for determining the present value of lump sums under 417(e)(3), and we'll talk about the annuity substitution rule in a little bit. It doesn't apply to calculations under Section 420 for transfers to retiree health accounts. And it does not apply to calculation of AFTAP, determine if the plan needs to, is subject to reporting under PBGC under 4010.
The determination if a plan is an at-risk status can be done twice. It's made separately for purposes for when MAP-21 segment rates do apply, and when they do not apply. They're determined on the basis of the interest rates used to determine the funding target for that specific purpose. Imagine what this would be like without computers. Possible result, plan could be in at-risk status under 404, but the plan may not be in at-risk status for determining the minimum contribution under 430.
So a lot of people ask about the annuity substitution rule under, in the regs under 430(d)(1)(4)(f)(iii). This requires lump sums which are based on 417(e) to generally be valued using the underlying annuity. And then the underlying annuities are valued using the 430 rates. There was a lot of concern that somehow there would be a disconnect between MAP-21 and the existing methodology, and the service might break that rule, which could have some pretty drastic effects on a lot of valuations. But, in the end, the differences between the 430 rates and the 417(e) rates were not deemed in the long term to be significant. And that's where the rule came in the beginning, because before MAP-21, just because of the way the segment rates are calculated differently for 430 and 417(e)(3), the feeling was that there wasn't a real significant difference between the two. And we've retained the annuity substitution rule because we think that over the long term that this difference will continue to be small and that there was no reason to change the application of this rule.
LM: Yeah, I think another factor – this is Linda Marshall – that when –
MS: Hi, Linda.
LM: Hi. Another factor in whether the annuity substitution rule continues to apply is that the annuity substitution rule is in an existing final regulation that's currently applicable and the legislative change was considered not to be direct enough for us to make a retroactive change to an existing final regulation.
MS: Yes. The rule does as I mentioned show up in a regulation, so it would have been more than us just changing a policy on how things were done. It would have been a change to a regulation, and would have been much more involved. And so we didn't seem to have the Congressional mandate to make a change to the reg, and we didn't feel that there was in any case a real good reason to do that.
So let's look at assets. If MAP-21 is used, the interest rates will be used for adjusting contributions receivable, using the prior year's effective rate. So if MAP-21 first applies in 2012 it's going to affect your assets for 2013, and also for the determination of the average value of assets. This could come in to the equation due to a cap on expected return on the third segment rate, and it can affect the actuarial value of assets even if the funding target is calculated using the full yield curve. So for funding, if using the full yield curve, you wouldn't be using the MAP-21 rates, but if you're calculating the actuarial value of assets, that cap could come in and affect the calculations anyway.
There's an option for 404 asset values, and it's written here, but simply stated, if the third segment rate after application of MAP-21 is greater than the unadjusted third segment rate the plan may elect to use the 430 asset value for 404 calculations as well. So under this scenario you're not required to keep track of two different sets of assets for 404 and 430. There's no similar rule for asset values for 420 or for purposes of PBGC 4010 filing. So in that case you would still be keeping track of two sets of assets.
I've had a lot of people call and ask about hybrid plans – how is this going to affect the market rate of return for hybrid plans? Well, as we all know, the hybrid plan regulations regarding market rates of return aren't final yet, and we haven't decided yet which rate of return should apply if you're using segment rate. Should be you using the segment rates ignoring MAP-21 or the MAP-21 segment rates obviously after reflecting the corridor? So people have called up and said, if my plan's crediting third segment rate, should I now automatically be using MAP-21 after third segment, or should I ignore that? Well, the answer is, we don't know what the answer is quite yet. So the final regs aren't going to be effective before January 1st of 2013. I think we could have probably all guessed that. If the final regs do provide the MAP-21 rates are too high, and if the plan has been using MAP-21, then you're going to need to go back and change to using the third segment rates or which of the segment rates we're using prior to application of MAP-21.
Okay. Let's take a look at Section 436. Presumption rules haven't changed, so you come into a new plan year and you're looking back at the prior plan year to determine what your AFTAP is on the first day of the plan year up until your first certification. That hasn't changed. If the AFTAP has not yet been certified for this year, you can just certify with the MAP-21 rates, unless of course you elected to delay MAP-21 until 2013. If the AFTAP for 2012 has already been certified before the issuance of MAP-21, you may recertify. And this can be done in two ways. You can retroactively recertify back to the date of the original certification, or one may prospectively recertify to the earlier of October 1st of 2012 or the date of the recertification. And that could bring up some interesting issues we'll talk about that in a minute. For initial certifications made after 9/30/2012 however, we're assuming that this certification was done with the knowledge of MAP-21 and the notice, and accordingly any changes made after that are under the old rules of material change, and you may have some issues and irrevocability may apply there.
Regarding 436 issues and retroactive recertification; you may correct distributions back to the first certification, so if the plan has not allowed for lump sums but now, due to recertification the plan could have allowed for lump sums providing people have perhaps delayed their distributions and haven't taken a lump sum, they could. You can reverse credit balance elections that were used or that were made, if it doesn't cause an unpaid minimum required contribution. Think about 436 contributions, if you'd made a 436 contribution, and the plan no longer needs it due to the application of MAP-21, you may redesignate that 436 contribution as a typical regular contribution to the plan. And any excess contributions made due to this over what was required, may be added to the pre-funding balance.
LM: Right. Now the provision under the Notice that lets you revoke elections for credit balances, those go only to the reduction elections, not the use elections. That's because –
MS: That's exactly right.
LM: -- the regulations already cover the use elections adequately.
MS: And that's right. If you have used your credit balance, that's a completely different animal. But if you have made what we, if you've burned a credit balance you may have that back.
Let's look at prospective application and recertification with respect to 436, I'm on slide 29. The only change applications going forward, beginning with the earlier of the date of recertification or October 1st of 2012. Certifications made before 9/30/2012 and recertified before 12/31/2012, anything that looks like it should have been deemed material is immaterial, and as I mentioned before, if you make your certification after September 30th of 2012 the old rules continue to apply regardless of – excuse me, with respect to certifications and changes that would maybe be deemed material.
I have some questions and answers here, I wanted to bring up something as long as I'm here, and talk about this particular issue where one may recertify prospectively for 436. The question was, if MAP-21 is elected for funding purposes for 2012 but is either not elected for benefit restrictions or is only elected prospectively, could this cause problems with respect to benefit restrictions in place? And the answer is yes, this could – keep this in mind, I've got an example – consider the situation where the AFTAP was originally certified to be 75, and after burning the portion of the credit balance we get to be over 80. Now, after application of MAP-21 only for funding purposes, the AFTAP is over 80% without forfeiting any credit balance. So elections to forfeit a portion of the credit balance are reversed. But this reversal is effective as of the date of the original election. And this could cause problems for any payments made in excess of the single life annuity made in the interim that were based on the prior AFTAP based on the burn. And the same situation arises when the provisions of MAP-21 are made only prospectively for purposes of 436. So keep that in mind. If you are only electing MAP-21 for funding, and not for 436 or for 436 prospectively, you need to go back and see what happens with any reversals of credit balance burns.
We look at slide 30. If there are UCEB's or plan amendments not initially allowed, AFTAP increases later in the plan year, they are, they must be retroactively allowed. Here's what Linda brought up. You may not reverse credit balance elections and you may not apply for the  contributions already made to cover the MRC if you haven't made the 436 election to use MAP-21.
Elections, you can elect to delay the effective date to 2013. That's not required until the filing due date with extension of the 2012 Form 5500. But you might want to make some decisions sooner. The decisions earlier might be made if it would affect operations under 436. I'm sure people have already been looking at this and thinking about it. And there may be reasons to not want to wait till the very end. And elections to reverse any funding balance elections need to be made by the end of the plan year.
These changes, if you have elected to use MAP-21 this may retroactively change your quarterly contributions. You may redesignate contributions originally designated for the 2011 plan year made in 2012, to be applied to the 2012 plan year. Election for this again isn't required until the filing due date with extensions. And it's important to note that this recharacterization of contributions is an exception to the general rule that the IRS has applied for some time, that contributions once designated to a certain plan year must remain designated to that plan year.
You may reverse elections to reduce credit balances for funding if it doesn't cause a problem under 436. This was the Q&A that I just brought up. And also you may not do this if it causes a problem with your minimum required contribution and reversing the elections causes an unpaid MRC to pop up. And then once again you may not change elections already made to use them. If you have used a credit balance for some purpose, say meeting your quarterlies, you may not go back and reverse that election.
Plans using a full yield curve do not receive any relief under MAP-21. We call it your funding relief, but if you're using the full yield curve you're still using the full yield curve. The plans however may change from a full yield curve to the segment rates and then move into using MAP-21 without requiring approval. However there needs to have an election made in order to do this. The election needs to be made for the first year MAP-21 applies. That could be in 2012 or 2013. And approval is automatic. The elections, slide 35, need to be made in writing to the enrolled actuary and plan administrator by July 5th of 2013 regardless of whether 2013 or 2012 is the first year that MAP applies. And if an election is made to change the segment rates and MAP-21 first applies for 430 and 2012 but doesn't apply to 436 until next year, then for 2012 segment rates would be used for 430. But the full yield curve would be used for 436.
And with that I'm going to turn it over to Amy. Amy, I know I used a little less time than I thought I would but that leaves us more time for questions at the end.
AV: Okay, great.
MS: Please take your time and then I'll go through the questions at the end with whatever time we have left.
AV: Okay. Sorry, I was trying to get ready and you were too quick! Okay, so MAP affected
PBGC issues in two ways, premiums and 4010. I'm going to go over both of them. Hopefully
all of the slides are in front of you. So now we're going to go to slide 37. The obvious thing it
did was increasing premium rates. There are higher rates for both the flat rate premium, for both multis and singles, and the variable rate premium, which has never gone up before, it's always been $9 for every thousand, and now it's going up. And the variable rate premium is now subject to indexing based on national average wages, just like the flat rate has been for several years. And for the first time there's a cap on – well, not the first time, because there was a cap a long, long time ago, but the cap has resurfaced on the variable rate premium. So I'll go over the rates and then I want to talk about some of the guidance we issued on premiums and some of the changes coming with MyPAA and the instructions.
Okay, so in the next slide, here's a little chart just showing you pre-MAP law and post-MAP law. The indexing rules are really confusingly written, so I just wanted to focus on what the rates would be if there was no indexing. So if national average wages stayed constant, this is what the rates would be. The flat rate's going up from $35 to $49 over the next couple of years. And the variable rate's going from $9 for every thousand of unfunded vested benefits up to $18. The cap right now is $400 times the number of people. The -participant count for this purposeis really easy, it's the same participant count you're using for the flat rate premium, so for those of you who use MyPAA to do your filings, that's our electronic software, if you're not using private sector software, we obviously had to add a few lines, but you're not going to have to do anything, you report the participant count and then the system will do the math for you because it'll be used to determine your flat rate premium and your VRP cap.
We can't technically say right now that the 2013 rate is going to be $9 for every thousand, but it's going to be $9 for every thousand. Unless national average wages go up by a lot, it's going to stay at $9, and it's not dependent on current national average wages. For 2013's rate, it depends on what happened to national average wages from 2010 to 2011, that's already happened, but until Social Security announces it, we can't use it. And unless they went up by more than 5.5%, it's going to be $9 for 2000.
So then we wanted to see what happens if we reflect the indexing, how much are rates going to go up, so we did a projection assuming national average wages increase 3% a year, which might be a little high in this environment, but it's just to show you what's going to happen. The flat rate premium over the next ten years will go up to $60. The variable rate premium will jump from $9 to $23. And the cap goes up to $507. And I wanted to point out that based on our calculations, you've probably all done the calculations for your client, but the cap is really not going to come into play very often. It'll come into play more as the variable rate premium goes up. But if the $400 cap had been in effect in 2011, I looked at the actual premium database, only about 30 plans would have been affected by it. So that's how premiums work.
Okay. Let's get into some guidance. MAP-21 didn't really change anything with how you determine the variable rate premium. It changed the rate, but then it said, not withstanding anything in any regulation, don't use those stabilized rates. A lot of people were confused about what notwithstanding anything in the regulation means. What it means is, don't use the stabilized rates, whether you're using the standardized method or the alternative method.
I think you all know that we offered the alternative as a burden saving device, and we described it as the vested portion of the funding target you're using for funding purposes. So you didn't have to do an extra calculation using spot segment rates instead of 24-month smooth segment rates just to determine the variable-rate premium. Unfortunately, that's not the case anymore. Now if you're using the alternative you still use whatever discount rate you're using for funding but without regard to stabilization. So if you'reusing 24-month smooth segment rates, after reflecting the corridor for funding, you have to go back and do it the other way (without the corridor) for premiums. So no matter what there's an extra calculation for premiums. But the alternative is still there. Some people weren't sure about that.
And then we also got some questions about, well, what if you're not at risk because you're using stabilized rates for funding purposes, but you would have been at risk if not for MAP-21. And what our guidance says is, you don't have to go back and do that what-if calculation. I think our regulations and our instructions are pretty clear that with the sole exception of discount rate, you use the assumptions you're using for minimum funding purposes to determine your premium funding target. And then for market value of assets, that didn't change at all. I don't think there was much question on that because MAP-21 only amended the liability part of the premium section of ERISA, not the asset part, so the assets are what you're using for funding purposes without regard to smoothing. And our regulation says you get to include contributions receivable but discount them at the effective interest rate. That's the normal effective interest rate, not the what-the-effective-interest-rate-would-have-been if you didn't use stabilized rate. So in general that's what you're going to report on line 2-A of your Schedule B as market value of assets. And this is all written down in our Technical Update 12-1 which you can find our web site.
Okay. What about when you actually have to do your filing, which for all but small plans is next month? The instructions are a little outdated now because they were published before MAP. So trust our tech update, not the instructions. For example, where the instructions say if you're using – when I say APFT, that's alternative premium funding target, so if you're using the alternative, the instructions still say it's the vested portion of the funding target. That's not true anymore. And it also, we have a table in there that helps us figure out what assumptions to use in our 'How to Determine UVB' section, and that basically says, if you're using the alternative, use the same discount rate you're using for minimum. That's not true anymore if you're using stabilized rates for minimum. So clearly, we're going to change all that for the future. We just couldn't' change it in time for this year. We have already submitted revised instructions for 2013 to OMB, they have to approve all forms and instructions. And the public gets to comment on that. The public usually knows they can comment on regs, but you can also comment on forms and instructions. And it's not too late. The comment period ends October 11th, and if you want to see the forms and instructions, go to reginfo.gov, click on 'Information Collection Review' and you can actually see that whole big 50-page booklet and what we think it's going to look like for 2013. And we'll make the similar changes to MyPAA like I mentioned before, so the cap will be handled, the new rates will be handled, all that kind of stuff.
Okay. This is really hard when people can't ask questions and I can't see any of you. But I'm done with premiums, if you have questions, shoot us an email. Oh, you know what I wanted to mention about the cap? For small employer plans, you guys have had a cap for a long time. If you have 25 or fewer employees in the whole control group, not participants, employees. So, for the past five or six years, for these plans, there has been a cap on the variable rate premium. That's still there. The $400 cap didn't override it. You actually get both. And in all likelihood the old cap will be better. That cap is $5 times the number of participants squared. If you have more than 80 participants, which you could have and you could still be eligible for the small employer cap, if you have a lot of retirees and not that many active employees, then maybe the $400 will be better for you. But don't worry, both caps are still there and MyPAA will do both calculations for you, and figure out which is less or if either applies.
Okay. Moving on to 4010.
ERISA 4010 provides that certain employers have to provide extra information to us, and if you've been doing 4010 filings for us in the past you know what it's all about, but I'm guessing there's a lot of people on the call who have never had to do one, so I want to give you a real quick overview. It's a controlled group filing, so it's not on a plan basis, it's all the plans in the controlled group. And the 2012 filings are first going to be due April 15th of 2013. There are three reasons you might have to file: if you have a large missed contribution over $1 million; if you have a large outstanding funding waiver; or the FTAP for any plan in the control group is less than 80%. And then by reg, we waive reporting only for the 80% test, if aggregate underfunding for all plans in your control group is under $15 million. So that's the basic 4010 trigger test.
So here's what MAP-21 did. They said the FTAP needs to be calculated without regard to the stabilization rules. Specifically what it says is the FTAP "as provided an ERISA 303", which basically means that it's the Treasury/IRS guidance that rules that calculation, so as Mike talked about earlier, in IRS Notice 2012-61, there's a whole "N/A" section for the calculations, where you have to do, calculate FTAPs or whatever without regard to the stabilization rules, and they have some special rules in there about how to calculate assets, the third segment rate might be different, contribution receivables might be different. What our guidance says is, even if you're under 80% funded if you do it the way IRS said, we'll waive reporting if, for the FTAP calculation, you would have been at least 80% funded if you used your regular asset value. In other words, you still have to calculate the liability without regard to stabilization rules, but you can use your regular actuarial value of assets. Of course, subtract the credit balance, you always have to do that. So that's a roundabout way of saying, do the liability, the funding target without regard to stabilization, and use either asset value. And if you're, if any of the plans are under 80%, then you have to do a 4010 filing.
MAP-21 didn't change the $15 million waiver. That's in our regulation, it's not in the statute. And that wacky language that says don't use stabilized rates notwithstanding anything in the regulation wasn't there for 4010. It was only there for premiums. So the $15 million test hasn't changed. You don't have to do a filing if the aggregate 4010 funding shortfall for all the plans in the control group is under $15 million. 4010 funding shortfall is a term we came up with in our reg and it's basically just the excess of the funding target that's used to determine the minimum required contribution over the asset value used to determine the minimum required contribution. No carving out the credit balance. That way, you can know really easily, without doing any extra calculations, if you qualify for the waiver or not.
Okay. Let's say you do have to report. If it's the first time you've ever had to report it'll take a little time. It gets easier the second year because most of the information doesn't change from year to year. But if you have to report, there are three kinds of things you have to report: identifying information about the plans and the employers in the controlled group; financial information; and actuarial information. And certain small plans might have to be reported, but you don't have to report the actuarial information. And that also refers to the 4010 funding shortfall to see if you're exempt from reporting actuarial information, and that didn't change either. So what did change? The only thing that changed is, if you have to report, two of the items you have to report, by statute, are the AFTAP and the funding target as if the plan had been at risk for at least five years. So those two calculations follow the IRS guidance. For everything else, do what you've always done. It's supposed to be parallel to what you're doing for minimum funding purposes. And this is all spelled out in our Technical Update 12-2.
And that's what PBGC did, so now I want to turn it back to Mike to answer some of the questions.
MS: Great! Thanks, Amy. I've got quite a few here. Like I said, the ones we don't answer
we'll have posted on the web site. The first one, and the first four questions we got were
identical in the question, and it has to do with a plan's, with the distributions to restricted
employees under 404(a)(4) regulations. Question is, assume a plan implements MAP-21,
effective for 2012 as intended, the plan prescribes that the 110% test to determine these
restrictions to restricted employees is using the funding target as a proxy for current
liability. Question is, for this purpose, may the funding target recognize the MAP-21 rates.
And like I said, it was interesting, the first four questions we got were exactly this question.
And it's interesting. We realize many plans are using the funding target of proxy for current liability for purpose, of course the service hasn't issued any formal guidance regarding this
matter. And so we're going to kind of punt here, and say that given the absence, the
continuing absence of formal guidance, our answer to this question is to do something
reasonable. So I think that leaves you perhaps a bit of leeway, and again since we're
starting out from the premise of using a funding target as a proxy for current liability,
without any guidance to do so, I think that a reasonable interpretation of the application of
MAP-21 here is about the best you can do.
Question two. How does the ability to defer MAP-21 apply in the case of a short plan year for 2012 that creates two plan years beginning in 2012? I hadn't thought about this. I like this question. Can the plan sponsor still defer to the 2013 year, or is the ability to defer limited to the first short plan year? So we got out the statute and looked, and it talks about pension amendments: the pension amendments under MAP-21 shall apply with respect to the plan year beginning after December 31, 2011. So it feels that a plan sponsor may elect to not have the amendments made by the section apply to any plan year beginning before January 2013, and delaying [implementation] at 2013 appears to be fine, even if a short plan year intervenes. So what I'm saying is, and this is as we said at the beginning not formal guidance, you could probably elect to not have it apply for both short plan years that begin in 2012. There's a more interesting question here, and that is whether MAP-21 could be ignored for the first plan year starting in 2012, and then applied to second one. Which of course isn't addressed at all. After some reading and some discussions, we've come to the conclusion that it appears the statute doesn't support this, but we don't have a specific answer. But it appears the statute – not the statute but the – yeah, the statute appears to suggest that it would be all or nothing for plan years beginning after December 31st and before January 1st 2013. So I think that the answer here would be, and the one I would be most comfortable with, if I were in private practice, would be to apply MAP-21 to both short plan years beginning in 2012, or to neither.
Third question has to do with end of year valuations. How do the MAP-21 interest rates affect the 1/1/2012 AFTAP for calendar year plan using end-of-year valuations, which generally use – in most cases they would be looking back, since we haven't issued any guidance, reasonable interpretation seems to have been that the 1/1/2012 AFTAP would have been determined using the 12/31/2011 end-of-year valuation results. And the MAP-21 interest rates are effective for plan years beginning on or after 1/1/2012, and the 1/1/2012 AFTAP is, in this case, has been calculated based on the 12/31/2011 valuation results, using the MAP-21 interest rates. Now what do we have to do. And I'd like to first point out that the guidance on doing this it's found, people are taking this from Notice 2008-21, which provides transition guidance for the first year for end-of-year plans, the service of course as everyone knows probably too well has not issued any formal guidance regarding calculation of AFTAP for plans using end-of-year valuation dates. The most we've done is what appears in the preamble to final 430 regs, that talks about, I'm just going to quote it here, "The regulation [not] including any special rules authorized under 430(6)(k) relating to the termination of AFTAP for plan uses a valuation date other than the first date of the plan year." Those rules, based on the rule describing Notice 2008-21 will be included in future regs." And the answer is again we don't really have an answer. And I would suggest that as people are doing something reasonable now, using the end-of-year AFTAP calculation for the beginning-of-year AFTAP in an end-of-year valuation situation, I would suggest that they continue to do something reasonable. And when I was in private practice, if I didn't something that wasn't, that I didn't feel was completely laid out in rules or regulations, I would document very well why I did what I did.
MOD: Pardon me, Mike, we have five minutes remaining.
MS: Thank you. Another question was simply why wasn't there any guidance on AFTAP for end-of-year vals? The answer was, they didn't feel a notice was the appropriate form to give guidance on end-of-year AFTAPS because we haven't given any formal guidance on the calculation of end-of-year AFTAPs in general. And, plus, it would have slowed down the notice.
Question five was the question I'd mentioned before, about would the MAP-21 rates apply to the measurement of the funding target for plans subject to the combined limit under 404(a)(7). The answer of course was calculations under 404(a)(7) must take into account the MAP-21 rates since they're only exempt under 404(o). This may have been an oversight, because it appears that Congress may have intended to preserve the full deductible limit, and may have not fully considered the application of the deduction under 404(a)(7).
There appears to be a conflict between Q&A T-3 of Notice 2013-61 and the final regs. The notice says however no changes may, is permitted with respect to 436 contributions that were made in connection with the presumed AFTAP for a plan year beginning in 2012. But the final regs provide for recharacterizations of 436 contributions that were made during the presumption period to allow UCEB benefits or plan amendment to the extent those contributions are not needed based on the later certified AFTAP. And though it appears that there's a conflict, the answer here is the existing rules allowing a recharacterization of 436 continues to apply.
The other question is; please specify whether a plan sponsor who terminated a defined benefit plan in 2012 but prior to issuance of MAP-21 made it, must make an election not to use MAP-21. I would say this is not completely spelled out, but a plain reading that I made of MAP-21 and the effective date says that the amendments made by MAP-21 are effective for plan years beginning after December 31, 2011, however you may elect not to have them apply. So if feels to me that even though the MAP-21 was enacted in this situation after the plan was terminated, an election would be in order, this is kind of a belt and braces approach that I would have taken while I was in consulting, would have been to have that election.
And I'm going to say that the last question would take longer than one minute.
FV: Okay, Amy may have something to say about terminated plans from the PBGC's perspective.
MS: Yeah, what do you, do you have something, Amy?
AV: I'm not prepared to say anything. Maybe I can get an answer for second –
FV: Because I know that in a lot of other cases where there was legislation after a plan was terminated, we had said that the new legislation doesn't apply. I don't know that we specifically addressed it here, but –
MS: And my answer was more of a belt and braces issue, if it's terminated, if you didn't want it to apply, I would go out, and again this is just based on a plain reading that didn't seem to say anything other than it would apply if you didn't, I would get an election. And with that, my clock shows 8:59. And the last question I have would take longer than this to
go through. So are we close enough to be done?
FV: I think we're done.