Shortfall Amortization Charge in year of termination

[Kenny]

There is a disagreement on the COPA board over how to treat the Shortfall Amortization Charge in the year of termination. Since I am currently reviewing a val report that deals with this for 2008 I am interested in getting as many opinions as possible.

Pre-PPA, the plan was treated as having a short plan year for purposes of prorating the FSA charges and credits in the year of termination (1.412(b)-4).

Post PPA, 1.430(a)-1(b)(2)(ii) indicates that the shortfall amortization charge is prorated for short plan years.

What do the esteemed AO Pension Actuaries think? Does a plan termination automatically create a short plan year for funding purposes such that the shortfall amortization charge is automatically prorated in the year of termination?

[tymesup]

If you didn't actually create a short plan year, I don't think the termination would do so automatically. Therefore, I don't think you can take advantage of 1(b)(2)(ii) automatically.

I don't see why you couldn't have a short plan year, though.

[Mark Cavazos]

This seems like an unnecessary exercise. The purpose of amortization is to spread the payments over a number of plan years. Since the plan is terminating, there are no plan years to amortize anything over.

Pre-PPA, in the year of termination, I change the method to unit credit, the valuation date to the termination date, change the asset method to market (there was automatic approval for these changes, and the assumptions to match the distribution (lump sums, annuity purchase). Then, the excess of the liability over the assets is the contribution.

Except for distressed terminations or when an owner waives a portion of their benefit, the bottom line is that at plan termination there has to be sufficient assets to pay the benefits.