End of year valuations

[FAPInJax]

What is the correct method for handling the following situation:

Valuation 12/31/2001

Interest rate 7%

Contribution 10/1/2001 35,000

Earnings 400

Market value of assets 35,400

Interest on contribution for Schedule B purposes

35,000 * (3/12) * .07 = 613

Assets for 412

35,400 - 35,000 - 613 = (213)

Should this be floored at zero????

Is the answer any different for the full funding calculations versus the funding method itself??

I believe the only prohibition is that the IRS takes a dim view of negative present value of future normal cost. For example, I believe it is acceptable to have a plan using Individual Aggregate where the retiree liability is bigger than the assets that negative amounts are allocated to the remaining employees to determine the normal cost.

Thanks in advance for any commentary.

[Guest Keith N]

I assume this is the first year for this plan?

Why are you doing EOY valuations if the client wants to put the money in before the EOY? Why not do a BOY valuation w/ $0 assets? I think it will eliminate your problem.

I think to really answer your question we would need to know what funding method your using and what your Normal Cost is as of the valuation date.

[mwyatt]

Frank:

I asked this question awhile ago on the boards. Here is a link to the thread:

http://benefitslink.com/boards/index.php?showtopic=12988

[david rigby]

If the 10/1/01 contribution is for the 2001 plan year, I think it should be ignored at the 12/31/2001 valuation date. If this is the first plan year, the beginning assets should be zero, regardless of the valuation date.

[FAPInJax]

Thanks for all the responses already!! The previous posting ended with a suggestion that it be included in the Gray Book for a future meeting. I would like to see if there isn't a consensus as to the method of resolving the situation.

Yes, this situation is a first year valuation BUT it could happen in the second year as well (consider the plan did a great job of investing in Enron the first year - assets the second year are nonexistent).

Everyone agrees that contributions made during the year are NOT included in the valuation assets.

The basic question is what happens when prepaid contributions are subjected from assets and the assets go negative?? OR, in my example, 412 purposes usually subtracts the interest credited on the prepaid contributions from the assets as well - causing the same problem (not necessarily so for 404).

Are they floored at zero?? Are they floored at zero for funding BUT full funding limits use negative assets to increase the full funding limit???

I vote for the consistency. The same result should apply for all purposes - funding and limits.

That being said, I think that the negative assets should be used and create larger contributions to the plan.

Additional comments are greatly appreciated.

[david rigby]

I also vote for consistency.

Although I'm not sure if it is the only way to do it in the second (or subsequent) year, I believe the valuation assets should be the value at 12/31/xx, minus the exact amount of any contributions already made for that year. However, I would still use zero at the first valuation date.

[MGB]

I will be submitting Q&As in the next week or so (deadline is Thanksgiving) and will add this, unless someone else wants to submit the question.