Shortfall Amortization Base or Charge

[Guest mingblue]

Have a small DB plan that pre-PPA was funded with Individual Aggregate - this method was not only reasonable but essential since there was a need to allocate pension cost by participant - enter PPA - what would be a mathematically appropriate way to allocate either the Shortfall Amortization Base or Charge ?

In proportion to Target Normal Cost ? Individual Aggregate NC ? Some other way ?

[Andy the Actuary]

Have a small DB plan that pre-PPA was funded with Individual Aggregate - this method was not only reasonable but essential since there was a need to allocate pension cost by participant - enter PPA - what would be a mathematically appropriate way to allocate either the Shortfall Amortization Base or Charge ?

In proportion to Target Normal Cost ? Individual Aggregate NC ? Some other way ?

What is the problem with continuing the IA method? It can be used for funding (old assumptions, etc.) so long as it produces a contribution greater than the PPA minimum under 430 and not exceeding 404. If it produces a lesser contribution, you could make a second pass at the IA method with the assets appropriately adjusted so as to come up with the 430 minimum. Presumably, the issue (perhaps not your issue) is how much of the contribution to report on Schedule C and how much on 1040. The IA method should still work. It's sort of what was done when the plan has inactives -- we'd first reduce the assets by the present value of inactives benefits and then perform the IA process.

[Guest mingblue]

IA produces a cost greater than PPA minimum - was asking the question in case sponsor wants to go with the minimum - but it's also an academic question - the sponsor is a group of docs - they keep track of pension expense along with other expenses for each participant for year-end bonus pool purposes - i.e. if a particular doc was being allocated 5% of the pension cost under IA then that doc wouldn't suddenly want to be allocated 20% for example - I could use the individual IA normal costs to breakout the Shortfall Base or Charge but would it be mathematically sound ? or alternatively, would using Target Normal Costs to do the break-out be mathematically correct ?

[Andy the Actuary]

IA produces a cost greater than PPA minimum - was asking the question in case sponsor wants to go with the minimum - but it's also an academic question - the sponsor is a group of docs - they keep track of pension expense along with other expenses for each participant for year-end bonus pool purposes - i.e. if a particular doc was being allocated 5% of the pension cost under IA then that doc wouldn't suddenly want to be allocated 20% for example - I could use the individual IA normal costs to breakout the Shortfall Base or Charge but would it be mathematically sound ? or alternatively, would using Target Normal Costs to do the break-out be mathematically correct ?

In your example, I would calculate the IA cost as before but adjusting assets so that the the aggregate IA cost agrees with the amount contributed.

[Guest GMP]

Or, if your software gives you the individual unit credit accrued liability figures (Funding Target), you could use that to prorate the shortfall amortization. This would be reasonable if you're already using the unit credit normal cost (Target Normal Cost) as part of your individual cost allocation reporting to the client.

[Dougsbpc]

What about allocating total costs on accrued benefits? Then consistently apply that method for all future years.

Would this produce approximately the same result as before?

[Blinky the 3-eyed Fish]

IMO assigning costs on the IA method is largely inappropriate if the goal is to match expenses versus payouts, and if you are talking about a group of docs, that most certainly is the objective.

[zimbo]

Why not allocate the Target Normal Cost in proportion to each employee's target normal cost. Then, allocate the remaining portion of the minimum (the Funding Shortfall amort and, perhaps, interest or carryover balance adjustments etc...) in proportion to each participant's funding target.

It has a certain logic to it although it is somewhat more work.