Pension Protection Act Guide - January 2009 - (Page 9)

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 required contribution or 90% of the current year’s minimum required contribution. Penalty for a late quarterly contribution is the greater of: 175% of the federal mid-term rate or the plan’s ongoing funding interest rate. Credit Balances for plan years beginning on or after January 1, 2008 A credit balance is created by contributions that exceed the minimum required contribution. Credit balances are allowed to be used without restriction to satisfy minimum funding requirements. Assets are not reduced by any credit balance in determining the funded status of the plan. The actuarial value of assets is not reduced by the plan’s credit balance to determine if DRC rules apply. Credit balances under current law are maintained. Pre-funding balances can be built after 2008 with contributions in excess of the amount needed to avoid benefit restrictions. Balances can be used in the future to offset required minimum contributions, as long as a plan is at least 80% funded in the preceding year (reducing assets only for balances created after 2008). • Balances are adjusted up or down each year based on the performance of plan assets in the preceding plan year. • Balances are used to reduce plan assets in test for “at-risk,” benefit restrictions and also for the calculation of the required minimum contribution. • Balances can be voluntarily and permanently waived to avoid “at-risk” status and imposition of benefit restrictions. Plan assets will be measured at market value, or smoothed over a period no longer than 24 months. Expected earnings may be included up to the third segment interest rate. for most purposes, plan assets will be reduced by funding standard carryover balances (current rules credit balance) and pre-funding balances. • The immediate impact would depend on whether your plan currently uses an asset smoothing method and how close the smoothed value is to the current market value. ongoing, the shorter smoothing period (24 months versus five years) will have some volatility to the funded status and resulting required contributions. Your plan actuary or analyst will work with you to assess which method to use for your plan based on your overall funding strategy. The ability to reflect expected earnings was added with WRERA; IRS guidance and an approval to change to this method with 2009 anniversaries is expected. Note: Plans can elect to use a smoothing pattern or move to a pure market value approach. • Funding flexibility is reduced and benefit restrictions may apply if your plan is funded under the 80% level. We will provide information as part of the annual valuation cycle to help you develop an appropriate strategy for whether the plan should elect to maintain or waive the credit balance. Plan Assets for plan years beginning on or after January 1, 2008 Plan asset smoothing is allowed (limited to the five most recent years). The asset values may not be less than 80% or more than 120% of the current market value as of the valuation date. At-Risk Plans for plan years beginning on or after January 1, 2008 No provision for “at-risk” plan. Plans are deemed to be “at-risk” if they are below 80% funded under normal assumptions and below 70% using “at-risk” assumptions, both measured in the preceding year (assets are reduced for credit balances and pre-funding balances). The 80% test phases in over four years, starting in 2008 at 65%. “At-risk” assumptions require liabilities to be calculated as if all participants who could elect to receive a benefit from the plan in the current year and the next 10 years elect to do so at the earliest possible time and in the most • Due to the phase-in rules, only severely underfunded plans initially should be affected. For the majority of the plans affected, the minimum contribution requirements will be higher. We will provide information to you during the next valuation cycle regarding your plan’s funded status to determine if “at-risk” status is a possibility and, if so, the ramifications. Note: Plans that do not offer subsidized early retirement or subsidized optional forms should not see a large impact from “at-risk” assumptions. 9

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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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