Accumulated Reconciliation Account

[FAPInJax]

There is a disagreement regarding the use of the ARA in funding.

Is it permissible to use the assets reduced by the ARA regardless of funding method (or even better - is it up to the discretion of the actuary whether or not to do so).

I recollect the IRS coming out and stating that the assets are NOT to be adjusted by the ARA. As a matter of fact, the 2002 Schedule B states on 9q - "Valuation assets should not be adjusted by the reconciliation account balance when computing the required minimum funding." (This actually seems to have gone beyond what I thought).

I thought it was only used for immediate gain funding methods (those creating bases and therefore requiring the equation of balance to work).

Any thoughts??

[Blinky the 3-eyed Fish]

I am curious as to what purpose you propose "use the assets reduced by the ARA regardless of funding method". Would your actuarial value of assets differ from the fair market value?

[david rigby]

...the use of the ARA in funding.

Pardon my ignorance, but what is meant by this?

[Blinky the 3-eyed Fish]

Accumulated reconciliation account. (It was in the subject header.)

[david rigby]

Duh.

But what is the purpose of the question?

[FAPInJax]

Sorry it wasn't very clear.

In immediate gain methods, the normal cost is determined independent of not only the ARA but the FSA balance.

A reasonable cost method cannot generate gains or losses if assumptions are exactly realized. A spread gain method will if assets are not reduced by the reconciliation account in addition to the funding standard account.

Take a simple one life example with five years to run, no compensation changes actual or assumed, interest of 5.00% exactly realized, and an amount needed in five years of 100000. The first year normal cost is simply 100000 divided by an annuity due for 5 years so the first year cost is 21998. Given that assumptions are exactly realized all along, this would be the normal cost every year, the funding standard account will be zero every year, assets will equal the accumulation of the normal costs every year.

If, along the way, there is a quarterly requirement which is not met, so there is a quarterly interest charge, this would require an additional contribution to satisfy funding standards but it should not change the fact that, if assumptions are exactly realized, there should be no change in normal cost. Assets will be larger because more money was contributed because of the quarterly requirement, the funding standard account will still be zero. If the cost were calculated using just those values, net assets (assets minus funding standard account) will be larger than it would have been absent the quarterly requirement. Same PVB, larger net assets, smaller PVFNC, lower normal cost, even though assumptions are exactly realized. This makes it an unreasonable funding method!

By further reducing the assets by the reconciliation account, the net assets become exactly the accumulation of the normal cost contributions so same PVB, same net assets, same PVFNC, same normal cost.

All of the above being true, the IRS has said that the ARA should NOT be used when calculating the minimum funding numbers for individual aggregate funding method. The example above indicates why their position is questionable.

The final question is whether it is an option for an actuary to use the ARA to maintain a level normal cost.

Hope this clarifies my original thoughts.

[MGB]

The ARA should never be used as an adjustment to assets, even in a spread-gain method.

I seem to recall the IRS stating in a conference session that they realize that this will cause disruptions in basic ideas, but that didn't faze them.