FTAP computed using vested benefits?

[Guest Jcarolan]

Our DB val provider is telling us that the FTAP and AFTAP on schedule SB (lines 14 and 15) are to be computed using only vested benefits in the denominator for the funding target. Section 430(d)(1) and 430(d)(2) define the Funding Target and the FTAP, respectively, and make no mention of using only vested benefits.

Are there regs out there saying that the FTAP and AFTAP should be computed using only vested benefits? I believe this goes against the line-by-line instructions for the SB. Has anyone else run into this?

Joseph

[Andy the Actuary]

Ask your DB provider to supply a reference to chapter and verse of the IRC or IRS Regulations that offers this direction. You will observe that the provider backs down. Vested FT is used (to my knowlege) only for determining the PBGC variable rate premium and for FASB35 reporting purposes.

[Guest Jcarolan]

Ask your DB provider to supply a reference to chapter and verse of the IRC or IRS Regulations that offers this direction. You will observe that the provider backs down. Vested FT is used (to my knowlege) only for determining the PBGC variable rate premium and for FASB35 reporting purposes.

I asked them for the basis they were using to apply vesting, and the only response I got was that vesting was only applied to terminated participants.

That approach makes a certain amount of sense, but I still don't know where they get the backing for it.

[Andy the Actuary]

If a participant terminates employment prior to becoming 100% vested, the vesting schedule is applied even though employee could in certain circumstance reclaim the forfeited amount if he/she were reemployed. So, for example, if a participant has an accrued monthly benefit of $100, is 40% vested, and terminates employment, the benefit valued is $40 and not $100. To follow this through, forgetting lump sums, the participant would start a pension of $40 at NRA and not $100. Thus, to value $100 would overstate the liability. Finally, to mutilate the dead horse, if 300 employees terminate with no vesting, you certainly wouldn't continue to hold liabilities for them [plans tend to include special language to preclude this].

[david rigby]

There might be some apples and oranges in this discussion.

Andy is correct to state that vesting is (generally) not relevant to the FTAP. This statement refers to the vesting status of active participant. Once an employee incurs a separation of employment, thus becoming an inactive participant, that person's vesting status is fixed, and only the vested portion of the benefit is relevant.

[FAPInJax]

An EOY valuation has a terminated participant who is not fully vested. What benefit is in the funding target and target normal cost?

Example

Accrued benefit BOY 100

Accrued benefit EOY 120

60 vested at termination and therefore entitled to 72

A

Funding target 100

TNC -28

B

Funding target 100

TNC 20

C

Funding target 60

TNC 12

Thanks for any and all comments.

[david rigby]

Ignore the vesting. FT => 100. NC => 20.

[SoCalActuary]

An EOY valuation has a terminated participant who is not fully vested. What benefit is in the funding target and target normal cost?

Example

Accrued benefit BOY 100

Accrued benefit EOY 120

60 vested at termination and therefore entitled to 72

A

Funding target 100

TNC -28

B

Funding target 100

TNC 20

C

Funding target 60

TNC 12

Thanks for any and all comments.

FT = 72 is my answer. TNC = 0. 28 is actuarial gain from turnover.

[david rigby]

I misread reread the Q; my previous answer is not correct.

I agree with SoCal.

[FAPInJax]

Shouldn't there be a NC for the benefit accrued during the year??

[david rigby]

NC = 0 since you have EOY valdate. The participant's status at valdate is inactive, so no NC.

[SoCalActuary]

Shouldn't there be a NC for the benefit accrued during the year??

I could argue for a TNC if the actuary believes there is any possibility of restoring the non-vested benefit. (E.g., potential partial termination of the plan, or participant re-hired before the valuation) Otherwise, no, these facts suggest that the EOY benefit does not exceed the BOY benefit.