Reasonable funding method

[flosfur]

Takeover case.

A plan covers an owner, his wife and a previously terminated employee. Owner and wife are not active but the business is still in existence. So they are not getting service/participation credits and hence no additional accruals.

Prior year’s info: Individual aggregate method. Present value of future benefits (PVFB) = $320k and assets = $272k.

In a nationally marketed software, the prior actuary coded the owner and the wife as “inactive”. As a result, the individual normal costs computed by the software are zero, which the actuary used for preparing the Sch B.

I think this is wrong as there are unfunded benefits which cannot never be funded under this calculation method. Anyway, it does not satisfy the funding equation for a reasonable funding method of regulation 1.412©(3)-1:

PVFB = PVNC + Net balance of bases (= 0) + (Assets – Credit Balance)

Do I need to go back and redo the prior year valuation and Sch B and file an amended return? Or can I simply redo the calcs and carry forward information based on recomputed numbers.

[SoCalActuary]

You need a funding method that provides a reasonable allocation of costs between past service and future service.

Based on these facts, all benefits are for past service.

So my answer is to fund on unit credit method and establish a base that reflects a change in funding method.

You should consider a letter to the former actuary, explaining why you believe the prior work was in error.

Give them a chance to respond, so they can fix their work if needed.

If they won't respond, then you may be forced to ask for more formal review by the ABCD. If it were me, I would also revise the prior year work and recommend to the client that they accept my calculations as a substitute for the prior work.

[david rigby]

I agree with SoCal. I would also review all assumptions.