Minimum Funding Cash Balance Plan

I have not seen this before and would appreciate your insight and comment.  A cash balance plan was established in 2015 with the plan year beginning 01/01/2015.  In reviewing the Annual Funding Notice the company has not made a contribution to the Plan in the first two years of its implementation, 2015.  Their Annual Funding Notice is confirming that no contributions have been made in 2015 and 2016.  Their Plan Adoption Agreement clearly outlines the benefit that should have been funded for:

[ X ] Group One:. An amount equal to:

[ X ] $ 190,000 for each Determination Period.

. [ X ] Group Two:  An amount equal to:

[ X ] $ 93,000 for each Determination Period.

[ X ] Group Three: All Other Participants . An amount equal to:

[ X ]2.50 percent of Compensation during the Determination Period.

A contribution has been made for the 2017 plan year and the funded status is over 100% in 2017.   My understanding is, in general the “minimum funding standards” requirement under the Code require sufficient assets in the Plan to meet the current liabilities.  For example in 2015 and 2016 there is a Plan liability to provide the projected retirement benefit however no asset, contribution, has been deposited.  

My only thought is the company is not funding the Plan based on the vesting schedule which is a 3-year cliff.  Therefore for years one and two (2015 and 2016) there is no benefit calculated because there are no benefits paid in the event a participant leaves service, no vesting.  In year three 2017 they become 100% vested and are due the accrued benefit from the time they became eligible.

I believe this approach is not correct.  The “minimum funding standards” ensure that sufficient money will be available to pay promised retirement benefits to employee when they retire, no mention of when the vest.  I have not seen this interpretation before and cannot locate a cite to justify its conclusion. 

Can this be possible?  Do you agree with funding based on the vesting schedule or funding based on the retirement benefit once eligible?  Your thoughts and comments, as always are appreciated. 

You are correct that you don't fund based on vested benefits. 

You stated the "funded status is over 100% in 2017" and which would imply they either actually made contributions (and the AFN is incorrect) or no contributions were required since either the assets exceeded the liability, or maybe the benefit was lower in 2015, 2016 and increased in 2017.

Lots of possibilities, but having the plan funded at 100% is the most important statement on the AFN.

You could also look at the actual 5500 filings which would give you a better picture.  They are available for free on the DOL website.  You have the EIN from the AFN and s/b able to easily find the 5500 for the prior years.   By looking at the actual 5500, you will be able to see exactly what they contributed and what the funded status was at all points.

Thank you and yes they made their first contribution in 2017.  My concern was the fact that no contributions were made in the first two years of the plan and they started making contributions in the third year.  Wouldn't this be a violation of the minimum funding standards beginning in year one and also in year two?  Have you seen this methodology in the initial funding of cash balance plans,  with a three year cliff? 

The minimum funding standard is equal to the target normal cost plus the shortfall amortization charge.

There could be no minimum required contribution in the first year if they obtained a waiver of the minimum funding standard, but in the second year the waiver amortization charge would apply and amortizations of prior funding waivers cannot themselves be waived.

Does the schedule SB show a funding deficiency?

Is it possible that agreement was amended?

" A contribution has been made for the 2017 plan year and the funded status is over 100% in 2017. "

This sounds to me like the contribution paid in 2017 was at least as much as was required for 2015, 2016, and 2017 in total.  So 2015 and 2016 have unfunded minimum required contributions, but after 2017, the plan is OK... ?  Or are you saying that the funded status is over 100% based on only 2017 benefit formulas and 2017 contributions (assets)... in which case the plan is not 100% funded since there are 3 years of benefit accruals but only 1 year of contributions. <confused>

also, remember 2016 contribution can be deposited up until 9/15/2017. and you have a funding deficiency for 2015 (and likely 2016) for which an excise tax applies, even if a massive contribution was made in 2018 for 2015, 2016 and 2017 combined.

chc93, correct, no contributions where made in 2015 and 2016.  A contribution was made in 2017 in an amount that provided a funding status of slightly over 100%. 

CuseFan, that was my initial reaction, irregardles of how much they contributed in 2017.  I am trying to obtain the Actuary's rationale on why he/she felt no contributions needed to be made in 2015 and 2016.

Thank you all.

Once you hear, please share!

Again, look at the 2015 2016 5500 and see if there were  deficiencies.  It would also tell you the benefit formulas in effect at that time.    This really doesn't make sense.  Why would you start  a plan, and then not  fund it.  Even if no contribution was required in year 1 and 2 (which seems highly unlikely), why would you pay the  administrative  costs to set it up and then not fund it.  The only logical explanation is what Cusefan (what is a Cuse, and why are you a fan?) describes - that is, maybe they set up the plan and then didn't have the cash to fund it, so you should see unpaid contributions in year 1 and 2.