PPA Cushion

[FAPInJax]

The following data is used in the example:

Participant age 55 retiring at 65 and has 5 years of accrual / service. The formula is 100% of high 3 with a valuation date of 1/1/2008.

Compensation

2007 200,000

2006 150,000

2005 100,000

Benefit for funding target

(200,000 + 150,000 + 100,000) / 3 * (5/15) = 50,000

Benefit for target normal cost

(200,000 + 200,000 + 150,000) / 3 * (6/15) - 50,000 = 23,333.33

Benefit for cushion

200,000 * 5/15 = 66,666.67

Therefore, my maximum would be the target normal cost plus funding target plus 50% of the funding target plus the difference between the cushion and the funding target less assets.

Now, a different scenario. A similar plan, however, compensation is only recognized while a participant as it is a new plan.

Benefit for funding target is zero (no compensation)

Benefit for target normal cost

200,000 * (6/15) = 80,000 (however, this should be limited to 1/10 of the 185,000 dollar limit?)

Benefit for cushion

200,000 * 5/15 = 66,666.67

Therefore, my maximum would be the target normal cost plus the difference between the cushion and funding target.

The latter example seems to be a strange result.

[Andy the Actuary]

The following data is used in the example:

Participant age 55 retiring at 65 and has 5 years of accrual / service. The formula is 100% of high 3 with a valuation date of 1/1/2008.

Compensation

2007 200,000

2006 150,000

2005 100,000

Benefit for funding target

(200,000 + 150,000 + 100,000) / 3 * (5/15) = 50,000

Benefit for target normal cost

(200,000 + 200,000 + 150,000) / 3 * (6/15) - 50,000 = 23,333.33

Benefit for cushion

200,000 * 5/15 = 66,666.67

Therefore, my maximum would be the target normal cost plus funding target plus 50% of the funding target plus the difference between the cushion and the funding target less assets.

Now, a different scenario. A similar plan, however, compensation is only recognized while a participant as it is a new plan.

Benefit for funding target is zero (no compensation)

Benefit for target normal cost

200,000 * (6/15) = 80,000 (however, this should be limited to 1/10 of the 185,000 dollar limit?)

Benefit for cushion

200,000 * 5/15 = 66,666.67

Therefore, my maximum would be the target normal cost plus the difference between the cushion and funding target.

The latter example seems to be a strange result.

Just another stirling example of the law of unintended consequences and why Congress would do well to scrap PPA in entirety.

[tymesup]

I think the benefit for the TNC and the cushion would be limited to the 415 limit of 18,500.