Pension Protection Act Guide - January 2009 - (Page 8)

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 and DC plan are eliminated for plans insured by the Pension Benefit Guaranty Corporation (PBGC). Basis for Measuring Liabilities (funding Target) for plan years beginning on or after January 1, 2008 Current liability is based on an interest rate between a 90% to 100% corridor of the four-year weighted average of the corporate bond rates. Mortality table is based on IRS published rates. Target liabilities based on a 24-month average of corporate bond rates (top three quality levels) and a mortality table to be specified in Regulations. The rates will use three segments of the yield curve, for liabilities payable in the first five years, the next 15 years, and periods after that. A sponsor can elect to use the actual yield curve. Rate can be chosen as of the first day of the plan year, or up to four months in advance of the plan anniversary. Must fund for optional form of benefit, including lump sums. • Target liabilities could be close to the current liability under current law, since the interest rates have risen over the past year and the yield curve is relatively flat. The new mortality basis may have a greater impact of increasing liabilities for predominantly male populations. • The option to use the actual yield curve rather than the three segments could remove some volatility. We will help you to determine the best option for your plan during the next valuation cycle. Note: Choosing a rate as of an earlier date can allow pre-plan year estimates for the upcoming year funded status, benefit restrictions, “at-risk,” and contribution requirements. Transition to New Minimum Contribution Rules for plan years beginning on or after January 1, 2008 Minimum required contribution is determined by comparing the results from an ongoing valuation and from the calculation of a deficit reduction contribution (DRC), which is based on current liability. DRC applies to plans that have over 100 participants and have a current liability ratio under 90% (or 80% if certain rules are met). full funding limit — minimum required contribution is limited to the amount that liabilities exceed assets. Credit balances based on prior year contributions in excess of the minimum required contribution can be used to reduce the amount of the current year contribution. Plans not subject to the deficit reduction contribution under current rules in 2007 may phase in the funding target for the 2008 plan year. Phase in of funding target: is: • 92% in 2008 • 94% in 2009 • 96% in 2010 • 100% in 2011 and after This means that plans above these percentages in a plan year will pay only their Normal Cost and an estimate of administrative expenses deducted from plan assets. Those below those levels who are otherwise eligible will create a shortfall base designed to fund only up to the percentage in the table (as amended by WRERA). Ability to use phase-in of new funding requirements is based on whether a plan had to calculate a DRC in 2007. Plans above 90% funded, or which had a gateway percentage above 90% for two consecutive years out of the preceding three plan years while still being above 80% in 2007, would meet that rule. • funding to the phase-in targets will add additional funding flexibility, but may require substantial additional contributions in the short–term. During the next valuation cycle, your plan actuary will: • Assist you in determining the recommended timing for plan contributions. • Help you determine if funding the plan to the phase-in targets is feasible. • Work with you to evaluate what impact the transition will have on your plan. Note: You may want to consider additional contributions for the 2006 plan year to avoid the DRC in 2007. In order to take advantage of these significant phase-ins, after 2007, you may want to consider funding to the phase-in milestones to continue to receive the advantage of the phase-ins. Contribution Requirements for plan years beginning on or after January 1, 2008 A plan is exempt from quarterly contributions if in the current year it is at least 100% funded on a current liability basis in the prior year. If plan is subject to quarterly contributions, the amount of each quarterly contribution is 25% of the lesser of 100% of the prior year’s minimum All plans that are not fully funded are required to contribute on a quarterly schedule effective for the 2008 plan year. Liquidity shortfall rules are unchanged by the new law. Contributions are due no later than 8 1⁄2 months after the end of the plan year. Any amounts paid after the end of the plan year will be included in the current year valuation assets at a discounted value. The penalty for missed or late quarterly contributions is now significant. • Plans that have not been required to contribute during the plan year in the past may be required to, with the first contributions due by April 15, 2008, for a January 1 plan year. During the next valuation cycle, we will provide the information necessary to determine if your plan will be subject to the quarterly contribution schedule. 8

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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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