"PPA" law type

The parameters of this topic, available under the “PPA” law type, pertain only to calculations pursuant to the Pension Protection Act of 2006 (PPA). For guidance, see Internal Revenue Code (IRC) Section 430, related Regulations and other published guidance, including the Instructions for Schedule SB of Form 5500 and, regarding amortization relief, IRS Notice 2011-3.

Check the Eligible for new shortfall amortization base transition rule box if, as of the Valuation Date (in a forecast, as of the baseline valuation date), the plan meets the requirements to use less than 100% of the funding target to determine exemption from setting up a new shortfall amortization base. (Note: if the current plan year is the first year the plan is in effect, do not check the box.) For eligible plans, ProVal will phase in the target liability percentage, used to determine the funding shortfall (if any), from 92% for the 2008 plan year (plan year beginning in 2008) to 100% for the 2011 plan year. If the plan is ineligible, 100% will be used for all plan years.

During a forecast, ProVal will evaluate the plan’s eligibility at each (forecast) valuation date after the baseline valuation date, based on whether any shortfall amortization bases exist at that date.

For Amortization Installments (generally arising from either a funding shortfall in a prior plan year or a funding waiver granted in a prior plan year) that have not yet been eliminated as of the Valuation Date, enter the Remaining Years as of the Valuation Date and the annual amount of the Amortization Installment payment. ProVal will use this amortization installment schedule to compute the shortfall amortization charge. If you have several amortization payments, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet. Note: if a remaining amortization period of more than 6 years has been entered (e.g., 9 years remaining in the 2009 plan year valuation for a commercial passenger airline electing relaxed funding standards), the Development of Shortfall Amortization Charge Valuation Set exhibit and Deterministic Forecast exhibit will include the amortization installment for that remaining period in the total installment present value but not list such amortization installment separately.

ProVal will use the underlying target liability interest rates specified in the Valuation Assumptions to calculate the present value of shortfall amortization installments, the amount of the new shortfall amortization base and the new base installment amount. If you wish to use other interest rates for these calculations, check the Override amortization interest rates box and enter the desired rates. This parameter is intended for basing shortfall amortization calculations on beginning of year spot rates, if you wish to do so, when the full yield curve has been selected for target liability calculations but middle of year spot rates (at durations 0.5, 1.5, etc.) have been entered in the Valuation Assumptions. In this case, the Look up button is useful for obtaining published historical beginning-of-year spot rates for durations 1.0 through 14.0. (For details about looking up and selecting interest rates for overriding in shortfall amortization calculations, see the separate discussion of parameters of the "Look up PPA corporate bond yield curve" dialog box.) Alternatively, you may type the desired rates in the 14 text fields. Note, however, that ProVal will not prevent you from using rates not matching those acceptable for the relevant calendar month (although ProVal will issue a warning). Note that it would be unusual to check this box if segment rates have been specified for the target liability calculations instead of the spot rate curve.

Enter for Year 1 the Interest Rate to be used to discount the amortization payment made one year after the Valuation Date; enter for Year 2 the Interest rate to be used to discount the amortization payment made two years after the Valuation Date back to the Valuation Date, and so forth.

In a deterministic or stochastic forecast, if shortfall amortization interest rate overrides have been entered, how ProVal determines the shortfall amortization interest rates at future valuation dates depends on how target liability interest rates are determined at those valuation dates. If the future target liability interest rates move in a parallel fashion, then ProVal will start with the specified override shortfall amortization interest rates, which apply at the baseline valuation date, and will change them according to the parallel changes in the target liability interest rates. If the future target liability interest rates shift in a non-parallel fashion, then, again, ProVal will start with the specified override shortfall amortization interest rates and assume that, for any given duration, the ratio of the difference between the override interest rates and the valuation (target liability) interest rates to the difference between the valuation interest rates at this and at the next duration will remain constant for all durations. If the difference between the valuation interest rates at durations one year apart is zero, ProVal will assume that the absolute difference between the override interest rate and the valuation interest rate remains constant (instead of the ratio of differences). The parameters that determine whether target liability interest rates shift in a parallel fashion are found under the Future Valuation Interest Rates topic of Deterministic Assumptions and the Legislated Interest Rates topic of Stochastic Assumptions.

Check the Elect Amortization Relief box to model the shortfall amortization extension provisions of the (Preservation of Access to Care for Medicare Beneficiaries and) Pension Relief Act of 2010. If elected, check up to two election Years and the desired Schedule, 2+7 or 15 yr. If an election year is in the past, relative to the Valuation Date, enter the remaining amortization installments pertaining to that election year in the Amortization Installments spreadsheet (located at the top of the dialog box), along with the “non-amortization relief” installments. ProVal always assumes that bases begin in the current plan year (the year beginning on the Valuation Date, entered under the Initial Asset Values topic); therefore, a negative adjustment may be required for a 2+7 schedule. For example, if the current plan year is 2010 and a 2+7 schedule was elected for the 2009 plan year, with $100,000 of amortization payments for each of 2 years and $1,000,000 for each of the next 7 years, enter this schedule into the Amortization Installments grid as 8 remaining years of $1,000,000 and 1 remaining year of $-900,000.

If accelerations apply, check the Reflect Accelerations box and then click the Schedules button to enter the acceleration parameters. For each relief year, enter an Acceleration schedule; this is the Acceleration Amount to be reflected in the current and future plan years. Additionally, if the relief year is prior to the current plan year, you must enter the Amortization relief schedule. Enter the amount of the Original 7-year amortization payment (the amortization installment calculated as if relief had not been elected; generally, this is the amount that was calculated when this amortization base was established) and a schedule of the Actual/expected amortization payments (amounts as of the Valuation Date). The amortization payments entered for years prior to the current year should include any acceleration amounts paid by the Valuation Date; the amortization payments for current and later years should not include acceleration amounts to be paid (as ProVal will include them automatically). The latest year included must have a payment amount of zero (i.e., enter 0 in the last row). Also, with respect to this base, enter the value, as of the Valuation Date, of any existing Acceleration carryover amount. The entries for the original payment and the actual/expected amortization payments will be used to limit the acceleration amounts as needed and to calculate the remaining amortization installment amounts.

Notes regarding amortization relief parameters in versions of ProVal 3.01 dated prior to 1/13/2011:

1. These versions contained the For 2+7, discount interest only payments check box, to calculate the first two installments (which are the “interest only” payments) as the amortization base amount multiplied by the effective interest rate and divided by (one plus the effective interest rate). This box was left unchecked to calculate the first two installments as the amortization base amount multiplied by the effective interest rate. Because checking the box was not in compliance with IRS Notice 2011-3 (issued after this check box was put into ProVal, at user request), this parameter has been removed from the Shortfall Amortization dialog box. If an existing Asset & Funding Policy library entry has a check in the For 2+7, discount interest only payments box (which can be verified by Viewing the Asset & Funding Policy) and you click OK upon exiting the Shortfall Amortization dialog box and then click Replace or Save as New, the (revised or new) Asset & Funding Policy will be saved without selection of discounting the first two installments. Thus if you use this (now revised) Asset & Funding Policy, you will not be able to reproduce prior results that reflect interest discounting of the first two installments.

2. The (sole) parameter to elect amortization relief was the text field to enter a Current year acceleration amount, if one is to be included in the new amortization installment amount of the current year. If an acceleration amount was entered, ProVal would include it in the shortfall amortization amount but disregard it for the determination of required quarterly contributions. If the current plan year is an election year and a current year shortfall amortization base is to be created, ProVal would calculate the amount of this base and then adjust it to reflect the value of the Current year acceleration parameter. For example, if a 2+7 schedule is elected and the base would be “paid off” by amortization payments of $100,000 each of the first 2 years followed by amortization payments of $1,000,000 for each of the next 7 years and an acceleration amount of $4,500,000 is entered, then ProVal would reduce the amortization payments, starting with the one to be “paid off” last (and working back towards the first one to be paid off). Assuming, for simplicity, that the valuation interest spot or segment rates are all 0% (so that interest accumulation or discounting can be ignored in our example), the revised schedule to “pay off” the current year shortfall amortization base becomes $100,000, $100,000, $1,000,000, $1,000,000, $500,000 and $0 for each of the remaining 4 years, so that the acceleration amount of $4,500,000 plus the sum of the revised annual amortization installments ($2,700,000) equals the total amount ($7,200,000) of the annual amortization installments that would be paid if there were no current year acceleration amount.