Equation of Balance

[Guest MikeMiller]

I have a plan that has been fully funded for the past 5 or so years. It is my understanding that when filing the schedule B it is okay to be out of balance (i.e. Unfunded Accrued Liability does not equal Outstanding balance of amortization bases less credit balance less reconciliation account). Thus, I have been out of balance for years. The valuation for 1/1/2002 produces a positive Unfunded Accrued Liability. How do I balance my equation of balance? Can you simply use a "Balancing Base" (simply the difference in the equation)? If so, how many years can you amortize this over? If not, what is the procedure to get back into balance?

[david rigby]

See IRS Proposed Reg. 1.412©(6)-1(g).

I don't know how you are "out of balance" for several years, unless you are using the Aggregate Method (or some variation).

[Guest MikeMiller]

I had previously been out of balance because my UAL was negative and I did not create any kind of balancing base for the equation; because it was my understanding that if your UAL was negative, then it was okay for the equation to be out of balance.

The funding method is Entry Age Normal.

[Blinky the 3-eyed Fish]

Mike, I would assume you have no amortization bases, but have a credit balance in the prior year and that is why you are out of balance.

The solution in a situation like this where you have an unfunded liability again is to make the experience loss an amount that forces the plan to balance.

[Guest MikeMiller]

Blinky,

Due to traditional full funding for 1/1/2001, all of my previous bases have been amortized.

For 1/1/2002 I do have both an amendment and an assumptions change that I have created bases for. For simplicity let's say my amendment base is 800,000, my assumptions change base is (4,000,000), I have an Actuarial Loss of 2,500,000 and a credit balance of 50,000 and my UAL is $30,000.

My equation of balance (currently) is this:

30,000 = 800,000 + 2,500,000 - 4,000,000 - 50,000

30,000 = -750,000 (which obviously is not equal)

Are you saying that I create a Loss in the amount of 780,000? If so, how many years is that amortized for (5?)

[Blinky the 3-eyed Fish]

Your numbers don't jive. I assume when you say "actuarial loss" you are referring to an experience loss. So, that being said, if your experience loss is 2,500,000, this would also be your unfunded liability at that point. (You hit a full funding limit in the prior year, so your expected UAL would be zero.) Thus, here is where you force the equation to balance by increasing the experience loss by the amount of the credit balance. Your balance equation at that point is then:

2,500,000 = 2,550,000 - 50,000

As far as your other bases you mention, they do not make sense. Why do you have such a large assumption change credit base? Perhaps it would be helpful to provide the accrued liability at each point, along with the actuarial value of the assets.

[MGB]

Two issues here: First, the order of calculations. The gain/loss is always done first. The IRS (EA Gray Book Q&A) has said that they don't have any preference between doing the amendment or change in assumption next. However, given that they are amortized over different periods, your final results will be affected by which you do first. The reason each ordering is going to give a different answer is that something is going to be limited to smaller bases than what you described.

The second issue is that at each step of the calculation, you must limit the UAL to be not less than zero. I assume that before the calculation of the loss, you were actually with a negative UAL. Therefore, the loss base is not the full 2,500,000, but is the actual UAL at that point minus the credit balance. For example, if the expected UAL before the loss base was -1,000,000, then the loss base is only 1,500,000+CB, because the UAL after recognizing the loss is 1,500,000. If the expected UAL was in the negative further than -2,550,000 (with the actual UAL after the loss being less than the DB), then you do not create a loss base and move on to the next step.

Here is where gamesmanship comes into play. If you do the change in assumptions first, you have to limit the UAL in the calculation to zero...so the base for the change in assumptions becomes no greater than the negative of the loss base you just set up (which may even be zero). Then you do the plan amendment change, which is going to start from a UAL of zero (not a negative), with the result being that this base is no more than the UAL+CB after all steps. In this case, the base is 80,000.

However, if you do the amendment before the change in assumptions, then you have the large positive base for the amendment, and a large credit base for the change in assumptions to bring you back down where you need to be.

However, the numbers that you cite in your reply don't make sense and can't be correct.

[Guest MikeMiller]

MGB,

My expected UAL as of 1/1/2002 is -93,631

The actual UAL as of 1/1/2002 is 3,413,417.

So my actual loss is:

3,413,417 - 50,000 (credit balance) = 3,363,417

Is this correct????

[Blinky the 3-eyed Fish]

You subtracted the credit balance when you should have added it. The balance equation, after only considering the experience loss and not the assumption or amendment bases, should be:

3,413,417 (UAL) = 3,463,417 (experience loss base) - 50,000 (cb)

By the way, your expected UAL is 0 for two reasons: 1- your expected UAL does not go below 0 and 2- you were at the full funding limit in the prior year.