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Credit Balances and Waivers

Credit Balances and Waivers ("PPA" law type) or Credit Balances ("Pre-PPA and PPA" law type)

The parameters of this topic pertain only to calculations pursuant to the Pension Protection Act of 2006 (PPA) for single-employer plans.  
This topic is entitled “Credit Balances and Waivers” under a “PPA” law selection but “Credit Balances” under a “Pre-PPA and PPA” law selection.

For guidance, see Internal Revenue Code (IRC) Sections 430 and 436, related Regulations and other published guidance, including the Instructions for Schedule SB of Form 5500. 

Check the Funding Standard Carryover Balance box if the plan sponsor elects ("PPA" law selection), or is presumed to elect at a future (forecast) valuation date ("Pre-PPA and PPA" law selection), to Maintain a funding standard account credit balance (FSCB) that exists at the end of the last plan year to which PPA did not apply ("PPA" law selection) or that may exist at the end of the last plan year to which PPA does not apply ("Pre-PPA and PPA" law selection). Typically, the last year before PPA applies is the 2007 plan year. If you are operating under the "PPA" law selection and your plan had a zero funding standard account balance, or an accumulated funding deficiency, at the end of the last plan year to which PPA did not apply, do not check the box. Likewise, if the plan was established after PPA took effect, do not check the box.

If you are operating under the "PPA" law selection and have checked the box to maintain the FSCB, enter the amount of the Current Balance as of the Valuation Date.

Check the Prefunding Balance box if the plan sponsor elects to Maintain a prefunding balance (PFB) that exists on the Valuation Date ("PPA" law selection) or is presumed to elect, at a future (forecast) valuation date, to maintain a PFB that may arise ("Pre-PPA and PPA" law selection). Note that, generally, a FSCB must be used before a PFB. Therefore, if you are operating under the "PPA" law selection and your plan had a funding standard account credit balance (i.e., a balance greater than zero) at the end of the last plan year to which PPA did not apply, then, if you check the Prefunding Balance box, be sure to check the Funding Standard Carryover Balance box, unless the FSCB has already been used up. If you are operating under the "Pre-PPA and PPA" law selection, under which ProVal will determine the amounts of credit balances at future valuation dates, and you check the Prefunding Balance box, then you should also check the Funding Standard Carryover Balance box (in case a funding standard account credit balance exists at the time of transition to PPA).

If you are operating under the "PPA" law selection and have checked the box to maintain the PFB, enter the amount of the Current Balance as of the Valuation Date. If the current plan year is the first plan year to which PPA applies, then enter zero. If the contribution schedule (entered under the Contribution Policy topic) contains prior year contributions that were paid after the Valuation Date and that are to be added to the PFB (e.g., contributions in excess of the prior year’s MRC), include the (beginning-of-year) discounted value of these contributions in the Current Balance amount. Note that, for purposes of applying the PFB to the current year Minimum Required Contribution (MRC), ProVal will do its own calculation of the discounted value of each prior plan year contribution entered in the Contribution Schedule and if the total discounted value it calculates for all prior year contributions is greater than the Current Balance amount entered, only a portion of the prior year contribution(s) entered in the schedule will be used. As part of this calculation, after determining the discounted value of prior year contributions, ProVal accumulates the Current Balance amount you entered (at the appropriate interest rate) to the date(s) of prior year contribution payment(s), compares this accumulated amount to the prior year contribution amount(s) and if the accumulated amount is less than the sum of the prior year contribution amounts entered in the contribution schedule, ProVal will reflect the smaller accumulated PFB amount, not the full amount of the prior year contribution(s), when it applies the PFB to pay the current year MRC.

If you have checked a box to maintain the FSCB and / or the PFB (jointly referred to as “credit balances” throughout the rest of this article), ProVal needs to develop the credit balance(s) at the end of the plan year and thus needs to know whether its calculations should reflect application of credit balances to reduce the Minimum Required Contribution (MRC), add excess contributions to the Prefunding Balance and / or reflect waivers of credit balances for other purposes (such as to avoid funding-based limits on benefits and benefit accruals). Therefore, optional parameters become accessible to

If you are operating under the "PPA" law selection, additional parameters become accessible to indicate whether the plan is eligible, for the current plan year (or, in a forecast, for the baseline year), to waive credit balances and / or apply them against the MRC. In a forecast under "Pre-PPA and PPA" law, however, ProVal determines both the credit balance amounts, as of the valuation date at which the funding rules of PPA take effect for the plan, and the plan’s eligibility to waive them or apply them against the MRC. ProVal reevaluates eligibility to use the credit balance(s) at subsequent valuation dates of a forecast (under either law selection).

A check in the Apply to Minimum Required Contribution, if eligible box indicates that you wish to use the credit balances, as necessary, to reduce the current plan year MRC – that is, the plan sponsor elects (or will elect, in a forecast) to credit against the MRC all or a portion of the FSCB and/or the PFB. Under the “PPA” law selection this parameter applies to a Valuation Set only if a Contribution Schedule is not entered (see the discussion of contribution timing in the U.S. qualified mode, under the Contribution Policy topic). If a Contribution Schedule is used under the “PPA” law selection, ProVal determines whether to apply credit balances to the MRC based on the contribution schedule settings for how required current plan year payments will be paid. Likewise, this parameter applies, in a forecast under the “PPA” law selection, for the initial valuation (baseline) year only if a Contribution Schedule is not entered. Also under the "PPA" law selection, if quarterly contributions are required for forecast years, credit balances are applied to the assumed quarterly contribution amount, which may reflect adjustment for the setting(s) of the Pay quarterly based on 100% of prior year MRC parameter of the Forecast Analysis topic. Under the “Pre-PPA and PPA" law selection, PPA cannot apply to the baseline year of the forecast. Therefore, ProVal will determine eligibility to apply the credit balances at the valuation date for the first plan year subject to the PPA funding rules, based on the parameter value for the "surrogate FTAP" entered under the Transition topic. At subsequent valuation dates, ProVal will determine eligibility based on the FTAP for the plan year ending at the (forecast) valuation date, computed as the ratio, at the prior forecast valuation date, of the asset value, reduced (only) by the PFB, to the funding target on the not-at-risk basis – referred to in the remainder of this article as the prior year FTAP. Under the "PPA" law selection, however, because PPA applies to the current year, you indicate eligibility, by your selection for the (following) Eligible to apply balances against MRC (80% funded last year) parameter.

Check the Eligible to apply balances against MRC (80% funded last year) box if the plan is eligible, for the current plan year (or, in a forecast, for the baseline year), to apply a credit balance against the MRC, presumably because the prior year ratio of assets, reduced (only) by the PFB, to the funding target on the not-at-risk basis is at least 80%. In a forecast, for years after the baseline year, ProVal will determine eligibility, based on the prior year FTAP (defined in the preceding paragraph).

A check in the Add excess contributions to Prefunding Balance box indicates that you wish to increase the Prefunding Balance by the amount of any excess contributions.

The remaining parameters of this topic relate mainly to an election to Waive balances to accomplish various purposes.

A check in the Meet x% AFTAP, if possible box indicates that, in order to avoid benefit restrictions, the plan sponsor elects (or will elect, in a forecast) to waive all or a portion of the credit balances. If the law selection is "Pre-PPA and PPA", the FTAP, rather than the Adjusted Funding Target Attainment Percentage (AFTAP), is referenced. There are two choices for the target AFTAP (FTAP) percentage: 60% and 80% / 60%. If 60% is selected, credit balances will be waived only to the extent necessary and only if it is possible to meet the 60% target. If 80% / 60% is selected, ProVal will first attempt to meet the 80% target and then, if that target cannot be met, will waive balances to maintain a 60% AFTAP, if possible. Note that this parameter is designed solely to waive credit balances to avoid benefit restrictions, so it will not be applied if the plan is deemed, based on its funded ratio (the current year AFTAP computed without reduction of the asset value by credit balances), not to be subject to benefit restrictions. Thus no potential waivers will be evaluated if the funded ratio is at least 100% and a lower threshold may be used if the Eligible for waive balances transition rule box (discussed below) is checked. Note that, for the purpose of waiving credit balances to raise the AFTAP, ProVal presumes that the plan has been in existence at least five years on the valuation date.

The Waive balances an additional 10%, if possible parameter is accessible if the Meet x% AFTAP if possible parameter is (accessible and) checked. (It is useful if you wish to gain time to complete the annual valuation without incurring benefit restrictions.) Choosing this option waives credit balances to achieve an AFTAP that is an additional 10% higher, if possible, which will avoid a presumption of underfunding after the first day of the 4th month of the plan year (when the prior year AFTAP is deemed to be reduced by 10% unless the current year AFTAP has been certified by the Actuary). If 80% / 60% is selected as the AFTAP target (discussed above), then, with this option, credit balances will be waived to meet the highest attainable of a 90%, 80%, 70% or 60% AFTAP, if possible. If 60% is selected as the AFTAP target, then credit balances will be waived to meet the highest attainable of a 70% or 60% AFTAP, if possible.

If you are operating under the "PPA" law selection and the Meet x% AFTAP if possible box is accessible and checked, then a check in the Eligible for waive balances transition rule box indicates that the plan is eligible, for the current plan year (or, in a forecast, for the baseline year), to use a transition rule in the process of determining whether balances can (if you have checked the Meet 60% or 80% AFTAP, if possible box) or must be waived. PPA requires that credit balances be waived if doing so will avoid subjecting the plan to benefit restrictions, but PPA further provides that no benefit restrictions are required, regardless of the AFTAP, if the current year funded ratio is at least 100%. This “waive balances transition rule” reduces the 100% funded ratio threshold to 92%, 94% and 96% for plan years beginning in 2008, 2009 and 2010, respectively. Thus if the Eligible for waive balances transition rule box is checked, credit balances will be waived if the funded ratio is less than 92% for 2008, 94% for 2009 or 96% for 2010 (instead of 100% without the transition rule) and the AFTAP is less than 60% or 80%, depending on your selection for the Meet x% AFTAP, if possible parameter.

During a forecast, eligibility to apply the transition rule for valuations at future (forecast) valuation dates, after the baseline valuation date, will be evaluated at the forecast valuation date in 2009, based on the 2008 plan year funded ratio, and at the forecast valuation date in 2010, based on the 2008 and 2009 plan year funded ratios. If you are operating under the "Pre-PPA and PPA" law selection, then PPA cannot apply to the baseline year of the forecast. Therefore ProVal makes the assumption that the plan is eligible to use the waive balances transition rule at the valuation date for the first plan year subject to the PPA funding rules, inasmuch as, generally, this is the 2008 plan year (for which PPA imposes no limitation on use of the waive balances transition rule – see IRC Section 436 (j) (3) (C)). For valuations at later forecast valuation dates, ProVal will evaluate eligibility to use this transition rule as described above for the "PPA" law selection.

If you are operating under the “PPA” law selection and the Meet x% AFTAP if possible box is accessible and checked, then a check in the Use x% minimum AFTAP for pre-10/1/2010 plan years box allows entry of an AFTAP to be used in place of the calculated AFTAP, if greater, for plan years beginning before 10/1/2010. (Enter the value of the AFTAP as a percentage, not a decimal number.) If 80% / 60% is selected as the AFTAP target, then the For 60% only (accelerated payments other than SSLI) box is accessible and you may check it to apply the minimum AFTAP only for the 60% calculation (presumably, to determine if benefit accruals must be frozen). You might wish to check the For 60% only (accelerated payments other than SSLI) box if your plan offered lump sums, for example, because lump sums are still potentially prohibited under the Pension Relief Act if the plan is not 80% funded on a current AFTAP basis. If the Waive balances an additional 10%, if possible box is checked also, ProVal will compare the specified minimum AFTAP against the 70% and 90% thresholds (in addition to the 60% and 80% thresholds).

A check in the Avoid At-Risk status, if possible box indicates that, in order to raise the current year FTAP, the plan sponsor elects (or will elect, in a forecast) to waive all or a portion of the credit balances to avoid at-risk status. Credit balances will be waived only to the extent necessary and only if it is possible to avoid at-risk status. Please note that the participant count determined by ProVal affects whether the plan is considered subject to the at-risk rules and thus affects application of this parameter. Despite a check in this box, if the plan is considered not-at-risk, no portion of credit balances will be waived. For more information about participant count, see the discussion of the Number of participants in all DB plans maintained by employer parameter of the Prior Year Values topic.

A check in the Be eligible to apply balances against MRC in the following year (80% funded) box indicates that, in order to be eligible to apply credit balances to the MRC the year following the current year, the plan sponsor elects (or will elect, in a forecast) to waive all or a portion of the PFB. If the FTAP (computed with assets reduced by only the PFB) in the prior year is at least 80%, ProVal will consider the plan eligible to apply the credit balances to the MRC. Credit balances will be waived only to the extent necessary and only if it is possible to reach an 80% FTAP. Before any portion of the PFB is waived, the entire FSCB is also waived.

A check in the Meet x% NAR FTAP box indicates that, in order to reach the specified not-at-risk FTAP, the plan sponsor elects (or will elect, in a forecast) to waive all or a portion of the credit balances. Choose whether the “Funding” or “Max Tax UC” FTAP should be used as the target (i.e. ,whether the liability used to compute the FTAP will be the funding not-at-risk liability, used to calculate the minimum required contribution, or the unit credit not-at-risk maximum tax deductible contribution liability, respectively). The credit balances will be waived only to the extent necessary to reach the specified FTAP (computed with assets reduced by both the FSCB and the PFB). (Enter the value of the FTAP as a percentage, not a decimal number.) If there is a check in the Do not waive balances if target cannot be met box, no credit balances will be waived if the specified FTAP cannot be reached.

Under a “PPA” law selection, enter the amounts of Non-HCE annuity purchases for AFTAP calculation for Year -1 (the year ending on the Valuation Date) and Year -2 (the year prior to the year ending on the Valuation Date) to use in the AFTAP calculation. Under a “Pre-PPA and PPA” law selection (i.e., you are running a forecast with a baseline year not subject to the PPA funding rules), the amounts of the non-HCE annuity purchases, if any, are presumed to be unknown, as of the baseline valuation date, and thus ProVal does not consider non-HCE annuity purchases in the AFTAP calculation. Because ProVal does not have this information under a “Pre-PPA and PPA” law selection, annuity purchase values are assumed to be zero in the valuation year and all future years.