Most Valuable Accrual Rate

[Blinky the 3-eyed Fish]

I am curious how the actuaries and defined benefit mainstays out there would calculate the most valuable accrual rate using the plan year testing method for a general tested plan.

Details:

Testing age and normal retirement age is 65

Normal form of benefit is single life annuity

Optional form is a joint & 50% survivor annuity

Actuarial Equivalents are 6% post/pre and 83 GAM Unisex

Testing Assumptions are 8.5% interest and 83 GAM Unisex

Compensation is $100,000

Benefit accrued during the year is $500 sla annuity paid monthly

Attained age is 50

I know you will have to break out the calculators and purchase rates, so I appreciate any input. Let me know if I forgot anything.

[Guest Doug Goelz]

I am assuming that the plan does not provide for any subsidized early retirement benefits and permits distributions at any age upon termination of employment. Therefore, I would calculate the Most Valuable Accrual Rate by normalizing the Qualified Joint & Survivor Annuity (QJSA) payable at an employee’s current age to a single life annuity at the testing age. I would determine the QJSA benefit based on the A.E. factors specified in the plan’s document, with spouses being assumed to be the same age as participants. This QJSA benefit is then normalized to a single life annuity at the testing age, using the testing assumptions. The resulting life annuity benefit deferred to the testing age is divided by testing service and the average annual compensation (assumed you will use current plan year option) to determine the Most Valuable Accrual Rate.

Annual accrued benefit: $6,000

Present value of accrued benefit: $ 25,976 (assumed post only)

(determined using only the 6% A.E. assumptions without regard to what applicable 417(e) rates are for year...may want to check how document is worded...I think most people ignore ignore 417(e) rates, but there are some that feel you should not)

Age of participant and spouse at year end: 50

QJSA annuity factor at 6.00%: 14.465

QJSA annuity factor at 8.50%: 11.240

Age 65 single life annuity factor at 8.50%: 8.888

QJSA benefit at current age of participant and spouse:

25,976 / 14.465 = 1,796

Normalized single life annuity benefit at age 65:

1,796 x 11.240 x 1.085^15 / 8.888 = 7,721

Therefore, the Most Valuable Accrual Rate is equal to 7.72% (= $7,721 / $100,000)

[Blinky the 3-eyed Fish]

Doug, thanks for responding. I am hoping others will take the time, even if it's to confirm they agree with Doug.

[Blinky the 3-eyed Fish]

I have now concluded that everyone agrees with Doug. All hail Doug!

[Guest merlin]

Sorry to be late to the post. I have two comments and a question:

1.I checked Doug's #s and I agree with them. There,somebody finally said it.

2.In Doug's example he states his assumption of no subsidized benefits.This greatly simplifies the calculation, and certainly corresponds to most of the plans I deal with. But if there are subsidies or options to which the participant may become entitled at some age in the future, the mvab will have to be calc'd at each such age and the greatest mvab is used for the test.Concievably this could require a calc for every age from AA to the TA.Ugh!

3.I know of at least one valuation program that calcs the mvab using vesting. Is this right? I can't remember anywhere in the non-discrim rules (there's a lot I can't remember there and elsewhere,but that's a different issue) that talks about anything but the"accrued benefit". Any comments?

Thank you