Unit Credit/PPA funding

[tymesup]

Suppose we have a plan established in 2007. The principal was hired 1/1/2002, makes 225,000 and has an NRA of 62.

The plan formula provides 5% of comp times years of service. Before the application of 415, the accrued benefit as of 1/1/07 is 225,000 x .05 x 5 = 56,250. As of 12/31/07 it's 67,500. After 415, both ABs are 15,000.

For 2007, when we determine the benefit accrual for Unit Credit Normal Cost purposes, do we have:

1 - 225,000 x .05 = 11,250

2 - 15,000 (EOY) - 0 (BOY) = 15,000

3 - 15,000 (EOY) - 15,000 (BOY) = 0

For Accrued Liability purposes, do we have 67,500 minus whatever we determined

for Normal Cost? Or are we limited to 15,000 minus the whatever piece?

For 2008, do we fund for the entire accrued benefit (227,500 x .05 x 7 = 79,625) or just the benefit after the 415 limit (185,000 x 2/10 = 37,000)?

Thanks for any thoughts on the subject.

[Andy the Actuary]

Seems like AL uses $18,000 (1/10 of $180,000) and UCNC=$0 because limited benefit is the same eoy as boy. Since UC method developes AL, you're done. In year two, the AB on 1/1/2008 is 1/10 of $185,000 = $18,500 and AB on 12/31/2008 = 2/10 x $185,000 = $37,000. You would develope UCNC based upon benefit that is 1/10 x $185,000. Prior to the Putrid Pension Act, the difference in AL 1/1/2008 attributable to the $5,000 increase in 415(b) would have been treated as a Plan amendment and a 30-yr amortization base would be established.

Do you come out with more favorable results using EAN method, though in 2008 you're effectively back to UCNC?

[tymesup]

15,000/18,000 - snagged on monthly/annual, again.

Similar to 2007, I think we can argue that the 1/1/08 benefit is equal to 185,000 x 2/10 = 37,000 (assuming a year of participation occurs after an hour of service.) Since we can fund 150% of the funding target, but only 100% of the target normal cost, it is better to have already accrued the benefit than to accrue it currently. This is in contrast to the Mirza treatment, where the deduction was tied to a normal cost based on one year's worth of 415 plus amortization of prior years' 415.

We were trying to come up with a 2007 design and funding that wouldn't blow up in 2008. Thanks to our friends in Washington for protecting pensions yet again.

[Andy the Actuary]

Not only would I agree but many of the professionals for whom I have administered small DB Plan generally work no more than 1 hour a year!

[tymesup]

Now that I think about it, it will never work to use 1 Hour of Service as a standard. All our plans use 1,000; as soon as they hire someone else, we're hosed.

I think our final design was to accrue a benefit that generated 80% of the 415 maximum each year. For year 2, we can fund (150% of the accrued + 100% of the accrual) x 80% of 415 = approximately 100% of 415. This gives us a little room up or down for contributions.