EOY Valuation and Accrued Benefit Cost Method

[Guest Mike Spickard]

Our software contains the following documentation for a certain Plan Level Variable.

IF THE ACCRUED LIABILITY FOR ACTIVE STATUS PARTICIPANTS IS TO BE DEFINED AS THE PRESENT VALUE OF THE BENEFITS ACCRUED UP TO AND INCLUDING THE CURRENT VALUATION DATE, ENTER PLAN-LEVEL VARIABLE #414 AS '0'. THE NORMAL COST WILL THEN BE THE PRESENT VALUE OF BENEFITS ACCRUING OVER THE ONE-YEAR PERIOD IMMEDIATELY AFTER THE CURRENT VALUATION DATE.

IF THE ACCRUED LIABILITY FOR ACTIVE STATUS PARTICIPANTS IS TO BE DEFINED AS THE PRESENT VALUE OF THE BENEFITS ACCRUED UP TO AND INCLUDING THE BEGINNING OF THE CURRENT PLAN YEAR, ENTER PLAN-LEVEL VARIABLE #414 AS '1'. THE NORMAL COST WILL THEN BE THE PRESENT VALUE OF BENEFITS ACCRUING OVER THE ONE YEAR PERIOD IMMEDIATELY AFTER THE PRIOR VALUATION DATE.

NO MATTER WHAT THE USER-ENTRY FOR PLAN-LEVEL VARIABLE #414, FOR NON-ACTIVE PLAN PARTICIPANTS THE ACCRUED LIABILITY IS DEFINED AS THE PRESENT VALUE OF THE BENEFITS ACCRUED UP TO AND INCLUDING THE CURRENT VALUATION DATE AND THE NORMAL COST WILL THEN BE ZERO.

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My questions:

Is it reasonable to have an end of year valuation normal cost with the accrued benefit funding method based upon the one-year period following the current valuation date? Shouldn’t it be based upon the one-year period that is the valuation year?

If the funding method is Unit Credit, it was my understanding that by definition the normal cost is the increase in the accrued benefit from the beginning of the Plan year to the end of the Plan year in the current valuation year. With the methodology that our software employs, we have the odd situation in some of our Plans where a participant hired during the Plan year (after the effective date), received their first allocation, terminated, and has no normal cost. If this is their first year in the Plan, how can they have no normal cost and only a past service liability?

[Blinky the 3-eyed Fish]

The "0" is for beginning of the year valuations and the "1" is for end of the year valuations. I don't see how you code it any other way. I am not sure why your software wouldn't pick that up from another field that spells out the valuation date, but then again, I don't know what software it is.

As for the terminees, I have seen many a program blanketly group all terminees as having just AL and no NC. It doesn't have much of an effect in a large plan but certainly can in a small plan where most of my clients range. Though I think if you look at unit credit as defined in Rev. Proc. 2000-40, it says the NC is the NC for active participants. Thus the fact that terminees are having all liabilities classified as past service isn't incorrect necessarily. Try reading the definition and see what you think. I am going on memory.