Unit credit funding

[FAPInJax]

All numbers presented below are estimates. The methodology is the basic question behind the valuation.

An actuary has decided to change funding method to unit credit. The plan does NOT have a credit balance BUT does have an accumulated reconciliation account of 3,000.

The valuation produces an accrued liability of 500,000 with assets of 300,000 (unadjusted for the CB or ARA).

An amortization base is established for both 404 and 412 equal to 200,000.

This immediately throws the balance equation off. Doesn't the ARA have to be taken into account in the establishment of the bases???

The client uses the unfunded current liability as the maximum for this year and contributes 50,000. This produces a credit balance of 30,000.

The subsequent year the assets take a huge jump so that the valuation produces an accrued liability of 600,000 with assets of 610,000. The ARA is now 5,000.

The remaining balance for the Method base is:

412 (200,000 - 20,000) 180,000

404 (200,000 - 50,000) 150,000

The ARA is still being ignored (as far as I can see) because the balancing item is the credit balance.

What should the gain/loss base be?? (Assuming zero interest)

It does not appear to be right (at least not the way I would have approached it).

Any and all comments are appreciated.

[Guest Steve C]

The ARA balance (with interest to the val date) should have been reflected when the 412 base was established. See, for example, section 5.01(2) of Rev Proc 2000-40.

[david rigby]

Yes, but before going down that path too quickly, what is the old funding method?

[FAPInJax]

I do not know what the old funding method was. I am just getting numbers and they did not appear to be correct from the outset.

Based on Steve's comments regarding the Revenue Procedure the original bases should have been:

404 200,000

412 203,000 (the 200,000 unfunded accrued liability plus the ARA)

That jives with my original thought that the original bases were off. The balance equation is being maintained using the above.

Now, what about the subsequent year?

There is no normal cost and the interest rate is zero (for discussion purposes only).

The actual unfunded liability (per the earlier posting) is -10,000 (600000 minus assets of 610,000). However, they now have a credit balance of 30,000 and an increased ARA of 5,000.

Is it then correct that the remaining outstanding bases should be equal to -10,000 plus 30,000 plus 5,000 equaling 25,000??

This would produce a gain base less than the original established base but still producing a positive result.

On the other hand, the 404 base would be set equal to the remaining base causing a zero net amortization base (although the payments would not net due to the different years). Hopefully, they realized that the plan is fully funded for 404 purposes.

[Blinky the 3-eyed Fish]

The unfunded accrued liability should not go below 0. There are many prior discussions on this board with details regarding that. That would mean that the remaining outstanding bases would equal 35,000 in your example.

[FAPInJax]

Thanks for the replies. I knew there were prior threads but wanted some feedback on the actual numbers. The client has reviewed the original calculations and realize the problem with not recognizing the ARA. The subsequent gain/loss is also being reviewed.