Valuation Assets

[Guest penman]

In calculating the 80%/120% corridor on actuarial value of assets, is the calculation:

1. (MKT + CONTR RECIEVABLE) * 1.20, or

2. (MKT * 1.20) + CONTR RECIEVABLE

[David MacLennan]

I don't have cites for you, but #2 is the common-sense answer from my point of view. Perhaps another DB person on the boards will give their opinion and provide a cite such as a gray book Q&A.

[Guest penman]

I agree with you and #2 is the way I initially have set it up. I spent a little time looking around and I could not find any definitive guidance. Maybe you can do either as long as you are consistent. Other opinions would be welcome.

[ishi]

A contribution receivable is treated as being made on the last day of the prior plan year. Thus any calculation involving the MVA (including the corridor limits) must include the contribution(s).

[Guest penman]

So there's a vote for #1.

[david rigby]

I could find nothing in Rev. Proc. 2000-40 or in the Gray Book that addresses this. The references in the Rev. Proc to the 80%-120% corridor refer to IRS reg. 1.412©(2)-1©. That is one simple paragraph that does not address this issue.

However, it sounds to me like this is part of how the actuary wants to define the method. So I vote for both.

[MGB]

I vote for no. 1.

In 1.412©(2)-1(b)(6), in setting the corridor, they refer to the fair market value (defined in Pax's reference) as of the valuation date. Later, in (7), the description of an averaging method uses similar language of fair market value to define the inputs to the averaging method. Given that you would include the receivable in the fair value before applying any averaging, I think it is appropriate to include before applying the corridor for consistency.

In the paragraph (8)(ii) about an "adjusted value" (part of the averaging process), they come very close to saying receivables are included.

Perhaps some actuaries do add receivables after averaging instead of before. In that case, then the corridor should be applied before the receivable. However, this doesn't make sense to me, for the earlier reason stated that receivables are deemed to be made on the last day of the prior plan year.

But, there is a very practical side of this. If it is appropriate to use either approach, wouldn't you want to use method 1 to give you more of a range?

[flosfur]

I would vote for #1 also for the following additional reason:

If the MV of plan's assets included cash & cash equivalents (money market etc) before the receivable, one would not exlude these from MV before appllying the corridor factors or would one?

As stated by someone above, receivable contributions are deemed made on the last day of PY and are therefore are "cash" assets.

To be consistent, if using #2, all cash & cash equivalents should also be excluded from MV before applying the corridor factors.

Extending the discussion a little further ....

I think the same should go for the interest & dividends recievable on stocks & bonds (bond values reported by brokers normally include accrued interest) that are ex-dividend?

So usnig method #2 is not that simple apply.

[Guest dsyrett]

I use #1 and have never given any thought to using #2.

[Mike Preston]

Count me as a vote for #1. Note that mathematically speaking, a vote that both are allowable is a vote for #1, as #2 will always be encompassed within #1 (unless the contribution receivable can be negative, which I doubt).

[David MacLennan]

In applying #1, if the valation is end-of-year, then end-of-year assets are reduced by the contributions made during the plan year BEFORE applying the corridor percentages? This seems to be what would be consistent with arguments made by proponents of #1, since you are again applying the corridor percentages to valuation assets.

[Mike Preston]

Advanced contributions are not contributions receivable.

[David MacLennan]

Mike, I realize my last post was off tangent a little, since the subject was accrued ctbs rather than advance ctbs. But I was wondering how proponents of #1 would handle an EOY val - one would reduce assets by advance ctbs after the 20% corridor limit is applied, or before?

[ishi]

In both cases (accrued cons or advanced cons), a market value is established first, then corridor limits are applied.