PPA Minimum Funding

[Gary]

I have a two person plan that has been in existance for about 4 years.

The employees are in their mid to late 30s with NRA of 55.

Under the pre PPA rules the minimum funding ($0 credit balance) was close to 23,000. Low due to the many years that the funding can be spread under the individual aggregate funding method.

Under post PPA the minimum funding was close to 70,000.

Due to the difference in the funding method, i.e. individual aggregate to a unit credit it is not surprising to me, but have others found such a dramatic increase from pre PPA to post PPA in some cases?

It can be a bit overwheliming to a client.

And lastly, I read in a summary of the Worker, Retiree and Employer Recovey Act of 2008 that under 415(b) the mortality table for adjustments is the 417(e)(3) table. Does this mean that instead of GAR94 the 417(e)(3) table is used for both pre age 62 early retirement adjustments and for maximum lump sums?

Thank you.

[Andy the Actuary]

How are benefits accruing? If rapidly, then that could explain the difference. Check your 70K and see how it compares to the 2008 CL unit credit normal cost.

[david rigby]

I agree w/ Andy. 23K to 70K does not seem sensible.

[Gary]

Under the old law valuation

The minimum was close to 23k based on aggregate level funding.

At BOY the Unfunded CL is 65k and the increase in CL during year is 75k.

So as you can see there is a large unfunded CL, and large increase (due to large increase in avg pay) thus allegedly explaining the large PPA minimum funding.

The 2 participants entered the plan with 10 years of past service and after the 4th year their AB is 25k and 7k, respectively. So yes we can say that the one participant has a fast accrual. The projected benefits used for individual aggregate are 48k and 14k, respectively.

Does the disparity make more sense now?

[Andy the Actuary]

How does the 75K compare to the TNC?

[ScottR]

Under the old law valuation

The minimum was close to 23k based on aggregate level funding.

At BOY the Unfunded CL is 65k and the increase in CL during year is 75k.

So as you can see there is a large unfunded CL, and large increase (due to large increase in avg pay) thus allegedly explaining the large PPA minimum funding.

The 2 participants entered the plan with 10 years of past service and after the 4th year their AB is 25k and 7k, respectively. So yes we can say that the one participant has a fast accrual. The projected benefits used for individual aggregate are 48k and 14k, respectively.

Does the disparity make more sense now?

Something is wrong here I think. Is that $25k accrual figure $25k of annual benefit payable at NRA? If that's accrued over a 14 year period, the annual accrual would be about 25/14 = 1786 of annual benefit per YOS. There's no way that's worth anywhere near $75k.... more like about $15k.

In response to your other question: Yes, I think we now use the current 417(e) mortality table for all 415 purposes. Believe this was effective retro to the first day of the 2008 PY.

.. S

[Gary]

The TNC is close to 55k at BOY as compared to 75k increase in CL at EOY. The CL was done at a 5.31% as compared to the 6.09% 3rd segment rate so it is not surprising that the CL is higher than PVAB under PPA.

Regarding AB

At the beginning of the year the AB was 28,667 (BOY avg pay) * 14/32 (total service pro rate accrual) = 12,542

At the EOY the AB is 47,667 (EOY avg pay) * 15/32 = 22,344

There is also a 100% j&s subsidy but that is the same for BOY and EOY accrual so not relevant to address here.

So due to the large increase in AB we have a large increase in PVAB accrual from BOY to EOY.

Perhaps this helps support this old law aggregate funding versus PPA disparity?

Thanks

[tymesup]

Not exactly on point, but why did they have a DB plan with a 23K contribution? Seems like a lot of trouble and actuarial fees for a relatively small contribution. 70K with the potential to grow seems like a more feasible arrangement.

[Gary]

It is a small contribution for a DB plan. I was not a part of the planning regarding the decision to implement a DB plan.

So it appears there are no further comments regarding the accuracy or reasonability associated with the impact of going from old law individual aggregate to PPA funding in our example?

Thank you.

[ScottR]

The TNC is close to 55k at BOY as compared to 75k increase in CL at EOY. The CL was done at a 5.31% as compared to the 6.09% 3rd segment rate so it is not surprising that the CL is higher than PVAB under PPA.

Regarding AB

At the beginning of the year the AB was 28,667 (BOY avg pay) * 14/32 (total service pro rate accrual) = 12,542

At the EOY the AB is 47,667 (EOY avg pay) * 15/32 = 22,344

The above would suggest that the comp earned in the latest year was huge, since it pulled his average comp up from 28667 to 47667. Shouldn't your projected benefit for aggregate funding be based on the latest year's comp (possibly with salary scale), and not the current high 3 average? To do the latter would essentially mean that you're projecting that future comps will drop dramatically, so that the current high 3 average will also be the average comp at NRA.

... S

[Gary]

Based on the volatility of the client's income, I use the current 3 year average. That is correct.

[ScottR]

Based on the volatility of the client's income, I use the current 3 year average. That is correct.

I guess it's a moot point now, but I'm wondering whether basing the projected benefit on current high 3 average comp represents a reasonable funding method.

In any event, we have an explanation for the disparity in results between the old and new methods. In my view, the PPA calc is generating the more realistic result. Never thought I'd say that!

... S