Jump to content

Recommended Posts

I find I am having trouble with the benefit accrual rules in 430(d). A client started a pension year in year X. Unit benefit formula is High 3 x5% per year of service ( including prior service). High 3 is computed based over all years of service. In year X there are 7 years of prior service and high 3 is $8000/month. Accrued benefit follows method under 430(d)-1(C)(1))ii)(C);

 at beginning of year X accrued benefit  is 5% x 7 x $8000=$2800 for the FT, and $400 for TNC. We are now in year x+2 and due to a huge bonus of $500000, High 3 is now $22,000. Accrued benefit for FT is then determined as 5% x 8* $22,000=$8800 and benefit for TNC is only $1100. Thus the big change in average comp is being spread over all years of service rather than applied in year X+1. Is this correct? And if the benefit accrual method were changed to where the increase in pay is fully applied in year X+1, is that a change in funding method?  My old brain is having trouble understanding if this is correct. Also, is there a way to change the benefit accrual method that doesn't require a change in the funding method. Appreciate any help understanding this rule.

Share this post


Link to post
Share on other sites

First... does your "x+2" should be "x+1"?  Anyway...

For valuation at x, accrued benefit is $2,800... use for FT at x.

For valuation at x+1, accrued benefit is $8,800... use for FT at x+1.

For valuation at x+1, TNC is benefit accrual from x to x+1... or $2,800 to $8,800... so benefit accrual is $6,000 for TNC.

Make sense?

 

Share this post


Link to post
Share on other sites
7 hours ago, chc93 said:

First... does your "x+2" should be "x+1"?  Anyway...

For valuation at x, accrued benefit is $2,800... use for FT at x.

For valuation at x+1, accrued benefit is $8,800... use for FT at x+1.

For valuation at x+1, TNC is benefit accrual from x to x+1... or $2,800 to $8,800... so benefit accrual is $6,000 for TNC.

Make sense?

 

Not to me. Try again? 

Share this post


Link to post
Share on other sites
12 hours ago, Mike Preston said:

Not to me. Try again? 

Yep... sorry to all who read this.  I've got the years all mixed up.  So for valuation at x+1, assuming average comp stays at $22,000 through year x+1, TNC is based on benefit accrual of $1,100.  Is this correct?

Share this post


Link to post
Share on other sites

Yup. Now does someone have the time to answer the OP's question? 

Share this post


Link to post
Share on other sites

For the minimum calculation, the change in value due to the bump in AMC is essentially spread over 7 years as an amortization base. For the maximum calculation, it's included in the Funding Target and the 50% cushion amount so your maximum should be more than you could get using any kind of change in method for the minimum (even if that were possible). The client will be able to fund the full value of the increase in Year 2 , even if the minimum funding calc's don't reflect that.

  • Like 1

Share this post


Link to post
Share on other sites

Thanks for the comments. I get it. If the benefit accrual method had followed the method using the accrued benefit model under B, the TNC would have been based on the full accrual and a very large normal cost. 

Share this post


Link to post
Share on other sites

I have one other question relating to this topic. If a plan has a unit credit formula, e.g. 5% x service x ave comp, isn't the only appropriate funding method that under C in 1.430-1(d)(c)(ii)(C) where the accrued benefit for FT is based on 8yrs  and TNC is based on 1 increase in service? That makes the TNC benefit small.  How could B or D apply to such a plan fiormula? Just looking for clarity here.

 

Also David's comment about comp limit would obviously apply here--I was just ignoring it for the example.

Share this post


Link to post
Share on other sites

I suppose I could use method B and define the function to be 100% of the accrued benefit. Then the FT would be based on the accrued benefit as the end of the prior year and the TNC would be based on the actual increase in the accrued benefit. If I'm interpreting this correctly then, this method uses the large increase in comp in year x=1 instead of spreading it over all years under C. Is this correct?

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×
×
  • Create New...