Post NRD in the PPA world

[Effen]

Pre-PPA I don't think it was ever a "problem" to assume individuals working beyond NRD retired on the valuation date and therefore had no normal cost. This is fairly common in "real" retirement plans.

If I used this method to do a small plan's BOY valuation where the primary person is beyond NRD I don't think I would have a TNC for that person. Then, if they worked the year and earned the benefit, their accrual would be part of Yr2's Funding Target and therefore amortized (assuming a funding shortfall) and not immediately funded like TNC. This seems to follow the old theory that pushed you to immediate gain methods if you had no active participants accruing benefits.

Typically I would have done these types of plans using EOY valuations, but w/ PPA it seems like shifting to BOY would actually be beneficial. I could use the 150% to fund the accrual if needed, or shift it into future if the client doesn't have the cash.

Does that seem right? Comments? Would anyone argue it is "unreasonable" to use a BOY valuation?

[Andy the Actuary]

Consider using the assumption that anyone whose AA on the actuarial valuation date >= NRA is assumed to retire one year later. Then, you will (possibly) get a TNC and will live happily ever after.

[david rigby]

I second Andy's suggestion.

[carrots]

Consider using the assumption that anyone whose AA on the actuarial valuation date >= NRA is assumed to retire one year later. Then, you will (possibly) get a TNC and will live happily ever after.

Say, in a BOY valuation for an owner only plan, this has been your regular actuarial assumption; but now the owner wants to terminate without making a further contribution to the plan. With this assumption, you will generate a TNC. Would you need approval to change the assumption to get a $0 TNC?

Assuming the owner and spouse are prepared to waive unfunded benefits, is there another way to get a $0 TNC?

[david rigby]

... is there another way to get a $0 TNC?

Amend the plan?

[Effen]

I would prefer NOT to have a TNC. My question is, do you think my assumption would be "unreasonable"?

Carrots makes a good point in that assuming they retire at the end of the year would create a TNC where I might not want one if they actually did retire early in the year (before they accrued the benefit). They would be forced to overfund their plan for a benefit that may never accrue.

[Andy the Actuary]

I would prefer NOT to have a TNC. My question is, do you think my assumption would be "unreasonable"?

How can you be unreasonable? You're following the law and nothing known to personkind is more reasonable than person-made law. (The un-pc "mankind" and "man-made" sound better)

[tymesup]

If you assume the participant will retire at the end of this year, you're adding a Target Normal Cost AND you're lowering the Funding Target. If your assumption is the participant will retire n years in the future, you're lowering the Funding Target even further. Can the Funding Target for someone at NRD change this way?

[Blinky the 3-eyed Fish]

I don't follow how you can be sure you are lowering the funding target. If the plan has benefit X payable at the BOY, then that benefit will be actuarially increased if assumed to be payable at the EOY. Of course specific plan provision dictate whether or not the AE is required. That actuarially increased benefit may cause a higher or lower funding target depending on the amount of the increase versus the valuation assumptions.

[tymesup]

Good point about the AE.

Most of our plans, an additional accrual would be worth more than the AE, so our Funding Target would generally be the BOY accrued discounted to EOY. I suppose we could value the BOY accrued as of the BOY and attribute the remainder to TNC, but it's ugly.

Are you sure you're not a mammal?