Effect of Negative Liability

[JButtrick]

If the UAAL is negative in any year, does the funding method revert to Aggregate or stay FIL?

If we stay with FIL, do we continue with negative UAAL? or

Set the negative UAAL to $0 for the following valuation.

Assume the plan is not subject to full funding limitation.

[david rigby]

The UAAL cannot be negative; just set it to zero. But then, whether you revert to Aggregate or stay with FIL is part of your funding method. BTW, if you stay with FIL, then it should behave as if it were Agg (at least for that year); thus, if you have a credit balance, the 412 NC will differ from the 404 NC.

[Guest EBW]

I thought a funding method change was required if the unfunded or normal cost become negative under the FIL method. A negative unfunded or normal cost using FIL would mean the funding method is no longer reasonable (for that plan at that point in time). The method change could simply be a re-establishment of the FIL unfunded using the entry age normal accrued liability (assuming this doesn't produce a negative unfunded). The change in method receives automatic approval under Rev Proc 2000-40 (see the special approval section).

[david rigby]

Permitted yes. But not required unless the funding method does not already provide for the next step.

[flosfur]

Per Rev. Rul. 81-213 (section 5.01): UAL is excess, if any, of AL over Assets.

So I would say, one cannot have a negative UAL (mathematically, yes, but per IRS rules, No).

In large plans I have seen actuaries actually coming up with a gain/loss during a year even though BOY & EOY UALs are -ve! I guess they did read this Rev. Rul.

Personally, I have not come across a case where the UAL is negative yet the plan is not at (ERISA) FFL? I guess it can happen!