IRS Provides Alternative DRC Funding Guidance

August 19, 2004 (PLANSPONSOR.com) - The Treasury Department and Internal Revenue Service (IRS) have provided guidance on the restrictions that are placed on plan amendments following an employer's election of the alternative deficit reduction contribution (DRC).

The Pension Funding Equity Act generally prohibits benefit improvements under a plan that makes the alternative deficit reduction contribution election, but provides for certain exceptions.Notice 2004-59provides rules for the application of this exception.

Oneexception laid out in the IRS’ document is where the plan’s enrolled actuary certifies that theamendment provides for an increase in annual contributions that willexceed the increase in annual minimum funding requirements for theplan attributable to the plan amendment.

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>This Notice is in addition to the previously issued Announcements 2004-38, 2004-43 and 2004-51 that set forth the procedures and timing with respect to this election (See IRS Provides Guidance on Alternative DRC Notice Requirements ).

DRC Provisions

As the rules stood prior to the passage of the Pension Funding Equity Act, companies that offer defined benefit pension plans were required to make additional contributions when they are less than 90% funded.  DRC rules require companies to close an underfunded gap on an accelerated basis, but that acceleration in funding flows can also impose a significant cash flow burden on a financially troubled employer since, during this period, they are also required to make their normally required pension contributions in addition to those imposed under the DRC requirements. 

The Act, which was passed on April 10, permitted alternative arrangements to satisfy DRC requirements  (See  Whew! Bush Signs Pension Relief ).  Outlined in the Act, Section 412(I)(12) of the Internal Revenue Code (IRC) was amended allowing certain employers who are required to make additional defined benefit contributions under Section 412(l) to elect a reduced amount of those contributions for certain plan years.  More specifically, the alternative arrangement applies to airlines and steel and iron manufactures.  Additionally, multiemployer plans that can certify a likely funding deficiency would be eligible to defer accounting for some investment losses and thereby avoid payment of excise taxes for underfunding

Companies that receive DRC relief will be required to contribute at least the amount necessary to fund the expected increase in current liability that results from benefits that have accrued during the year.  An election to make the alternative DRC for any plan year must be made by the end of the first quarter of that plan year.

A copy of Notice 2004-59 is available   here.

PerTrac: Hedge Funds 0.65% Lower in July

August 18, 2004 (PLANSPONSOR.com) - Hedge funds posted an average 0.65% loss in July.

The top 25% ofhedge funds gained an average 0.58%, while the bottom 25% of hedge funds lostan average 1.57% for the month.  Short Bias sector funds, the month’s topperforming strategy, were up an average of 4.31%, according to the HedgeFund.net-PerTrac Universes.

Other winning strategies in July included Fixed income (non-arbitrage) (1.04%) and Fixed income (arbitrage) (0.74%).   Technology sector funds were July’s worst performing strategy, down 6.27%.   Other losing strategies in July were Long/Short equity (-1.32%) and Value (-1.15%).

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Through July, the year-to-date average gain for hedge funds was 1.43%. Thetop 25% of hedge funds gained 4.32% year-to-date, while the bottom 25% lost anaverage 1.71%. 

In June, hedge funds gained an average 0.27%, with the top 25% of hedgefunds gaining an average of 1.19% and the bottom 25% losing an average 0.44%.

By comparison, the S&P 500was down 3.43% in July.   Year-to-date t he S&P 500 has gained 0.92%.

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