We recently had a sponsor that inquired about amending their program to improve benefits. The program was exactly 80% funded as of January 1, 2023. One of the questions that came up during the discussion was if the plan was funded well enough to consider an amendment. Normally, it would be preferred for a program to have funded a majority of the benefits already earned before increasing contributions to pay for larger benefits to be accrued in the future.
There is no rule that directly applies to a LOSAP when it comes to this question. There are IRS rules that apply to qualified plans, for example the cost impact of any benefit improvement to a plan that is under 80% must be immediately funded and cannot be amortized into the future. Additionally, accelerated forms of payment, such as lump sums, are restricted when a plan has a a funded ratio under 80%. But again, no such rules apply to a LOSAP.
In doing some research to point to a specific article on this topic for our client, we came across an article from the Society of Actuaries on a commonly cited theory that a plan is healthy if the funded ratio is 80%. This article was very thorough and touched on may topics we routinely discuss with clients. Therefore, we thought we would share it with you! Please read the article by following this link:
If you have additional questions after reading this article, please contact us!