Effective Interest Rates

[carrots]

There appear to be two different effective interest rates on the Schedule SB: at Line 5 and at Line 11b.

In a small plan, a $25,000 contribution for 2008 was paid on 2/13/2009.

For the 1/1/2009 valuation, to determine BOY assets, I believe that I should use the 2008 Line 5 effective rate to discount that contribution to the valuation date.

The Line 11b effective rate, that will appear on the 2009 Schedule SB is -18.41%.

Am I correct that the Line 11b effective rate is only used to calculate the 1/1/2009 prefunding balance?

Thanks!

[Andy the Actuary]

Your -18% looks like the line 10 item.

You did the 2008 valuation and let's say the effective rate was 5.93%. The PFB on 1/1/2008 is $0. The 2/13/2009 contribution should be discounted to 1/1/2008 at 5.93% so you get about $23,500. Now, let's suppose your working on the 2009 Schedule SB and the 2009 effective rate is 6.11 and your actual rate of return is -18%. Also, suppose your 2008 required contribution was 20,000, so excess 2008 contributions are $3,500.

So, here's what we have: Line 5 - 6.11; Line 10 - -18; line 11a=3,500, and Line 11.b - 5.93 so that 11.b = 3,700 (3,500 x 1.0593). The -18% does not come into play unless you had an FSCOB at 1/1/2008, in which case you would loose 18%, which would have been all told, a reasonably good year!

[carrots]

Andy: Yes, so it looks like the entry on line 11b of the 2009 Schedule SB (assuming no major changes from 2008) will be the same as the entry on line 5 of the 2008 Schedule SB. And, as you said, the actual return will go on line 10.

Thanks!