Pension Protection Act Guide - January 2009 - (Page 7)

Pension Protection Act Guide – Defined Benefit (DB) Plans SpEcIfIc poINtS EffEctIvE DatE currENt Law pENSIoN protEctIoN act what It mEaNS to you Db fuNDINg ruLE chaNgES continued the funded status falls below the 90% level in two of the past three plan years. Minimum Required Contributions: • Equal to the plan’s normal cost plus a seven-year amortization of the unfunded funding target liability of the plan measured under the new rules. Poorly funded plans will have to fund to the “at-risk” liability (see page 9). • Plan assets under the new rules will be based on market value with permitted smoothing over 24 months. Smoothed assets must be within 10% of market value. • The Worker, Retiree, and Employer Recovery Act (WRERA) of 2008 added transition rules that reduce required funding beginning in 2008 for a limited number of well-funded plans. • If this provision affects you and you are a client of The Principal, you will be notified. DB plan deduction increased to allow a contribution up to 150% of the current liability (140% for multiemployer plans). Beginning in 2006, the combined deduction limits for sponsors with both a DB and DC plan are eased. In 2006 and 2007, the first 6% of employer contributions to the DC plan are not counted toward the 25% of compensation limit. Generally, minimum contributions will be less predictable due to the volatility of the required interest rate assumptions. however, due to the relatively large deductible limits (see below), a stable funding pattern can be developed to meet your needs. Interest accrues from the date the contribution is due. Paying early within a plan year can reduce the cash cost of the plan. funding Deductions for taxable years beginning on or after January 1, 2006 Deduct the greater of: the amount necessary to satisfy minimum funding requirements or the sum of the plan’s normal cost for the year, plus the amount necessary to amortize unfunded liabilities (10 year amortization). The maximum deductible limit is not less than the unfunded current liability. for an employer with both a DB and a DC plan, the overall limit is the greater of: 25% of compensation for the plan year or the contribution necessary to meet the minimum funding requirement for the DB plan or pension plan (not less than the amount of the plan’s unfunded current liability). • Increases the deductible limit significantly which will give you an opportunity to increase your plan’s funded status. Contact your plan actuary or analyst if you would like to take advantage of these new higher limits. • During your next valuation cycle, information will be provided to you so you can determine whether the deduction flexibility can be used to establish a long-term funding pattern that meets your needs. for taxable years beginning on or after January 1, 2008 Beginning with the 2008 plan year, the maximum tax deductible contribution for DB plans is increased to the greater of: • The minimum required contribution. • The normal cost plus 150% of the funding target plus future compensation increases (for final average pay benefit formulas) or benefit increases (for plans with benefit formulas not related to compensation) – plan assets (unreduced by credit balance). • If the plan is not “at-risk,” the normal cost plus funding target determined as if the plan were “at-risk” plan assets (unreduced by credit balance). In 2008, the combined deduction limits for sponsors with both a DB • For plans with benefit formulas based on final average compensations, the deductible limit can increase significantly, offering even more funding flexibility. Note: The funding deduction rules should not affect tax exempt organizations. 7

Table of Contents Feed for the Digital Edition of Pension Protection Act Guide - January 2009

Pension Protection Act Guide - January 2009 Contents Multiple Plan Types Defined Benefit (DB) Plans Defined Contribution (DC) Plans Employer Securities Nonqualified Individual Investors

Pension Protection Act Guide - January 2009

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