Calculatign EBARs

[Guest SPOT]

I am comparing two formulas that calculate EBARs (I'm a beginner).

1. ERCTBN * 1.085^(NRA-AA)/95.382/AVG Monthly compensation

2. ERCTBN * 1.085^(NRA-AA)/7.9486/ANNUAL Compensation

I'm using the UP-84 mortality table and 8.5% interest.

My understanding is that the APR of 95.382 in formula #1 = 7.9486 multiplied by 12. I'm assuming the 7.9486 is a monthly annuity rate and multiplying it by 12 converts it to an annual rate. Please correct me if I'm wrong.

The software program that uses the first formula #1 takes into account compensation from plan entry for a mid-year entrant if I want it to. For instance, if an employee enters the plan 7/1/2003 and has compensation from 7/1/2003-12/31/2003 for 120,000, the system calculated the avg monthly compensation to be 20000.

The second formula is used in a spreadsheet. If I want to use full year compensation for everyone in the plan, then I see no problem. If I want to use compensation from plan entry, I don't think the formula can handle that. If I enter compensation from plan entry as Annual Compensation, then the formula assumes the compensation I input was for a 12 period. Does this make sense? Can anyone tell me how to adjust the formula for mid-year entrants? Would I prorate the annuity factor?

Any help would be greatly appreciated!

[Mike Preston]

I think putting in the compensation earned while a participant in the second formula is exactly what you want, isn't it?

[Guest SPOT]

I'm not sure if the factor is correct when the compensation I input is only for a portion of the year. I'm getting extremely high EBARs when I enter compensation from plan entry for the second formula.

[Mike Preston]

If by extremely high you mean about twice as much as you would expect if you used full year compensation, I agree with your calculations.