Home > Uncategorized > DRC versus AFC versus Shortfall base exemption

DRC versus AFC versus Shortfall base exemption

October 10th, 2008

A few students have pointed out that some of my practice problems are not 100% clear. Well, yeah, DUH – this is PPA 2006 we’re talking about, right?!

The issue has to do with IRC 430 and single employer plans. When determining the exemption from establishing a shortfall amortization base, a plan may be able to use an applicable percentage that is less than 100%.

IRC 430(c)(5) has several criteria the plan must meet. One of them is that the plan was not subject to the 412(l) Deficit Reduction Contribution in 2007. In some of my practice problems, I make this statement: “The 412(l) Deficit Reduction Contribution for 2007 is zero”. But that is not necessarily the same as saying that “the plan was not subject to the 412(l) Deficit Reduction Contribution in 2007”.

It is definitely possible for a plan to be subject to 412(l) in 2007, and yet the value of the DRC is zero. You are supposed to interpret the statement in the problem about a zero DRC to also imply that the plan was not subject to 412(l).

Based on my review of the 2007 exam, they avoided any potentially unclear language on the exam problems. Next year, I will clarify the language in my practice problems.

PRACTICAL NOTE

There is additional detail in the proposed regualtion on this idea. It states that the transition rule “does not apply to a plan … that was subject to 412(l) for the pre-effective year ….” The regulation makes it clear that a plan can be subject to 412(l), and also have a zero DRC.

The proposed regulations are not on the EA-2A syllabus. In 2008, the EA-2A exam questions have to be based solely on the Internal Revenue Code. You should not worry about details in the proposed regulation.

Uncategorized

  1. No comments yet.
  1. No trackbacks yet.
You must be logged in to post a comment.