Example from Slide 19 of today's webcast

[ak2ary]

Someone asked me to post this

In the webcast today I gave an example of interest on excess contributions for the year of deposit.

The excess contribution that is truly in excess of the gross MRC is credited with interest at the effective rate while the portion of the excess contribution that is excess only because of a prior application of the PFB is credited at the actual rate

Consider a plan that has the following

1/1/10 MRC 25,000

1/1/10 PFB 17,000

2010 Contrib 60,000 made 1/1/10

PFB election On 1/1/10 the employer elects to apply $10,000 of the PFB to offset the MRC

Since 10,000 of PFB is utilized to offset the MRC, the remaining amount of MRC is $15,000 after the offset

This means that the 60,000 contribution consists of $15,000 to satisfy the MRC and $45,000 of excess contributions.

The excess contribution of $45,000 consists of $35,000 of true excess (60,000 - 25,000) and 10,000 of additional excess due to the PFB utilization that adjusted the MRC from 25,000 to 15,000.

When rolling these contributions forward to 1/1/11 to add to the prefunding balance, the 35,000 will be credited at the effective rate for 2010 and the $10,000 will be credited at the actual rate of return.

Caveat- this assume the contribution is made on 1/1... if it was made later, the 60,000 would be discounted back to 1/1 using the effective rate and the discounted contribution would be divided into true excess and excesss due to a PFB utilization as of the 1/1 dates. These present values would then be brought forward to 1/1/11 at the effective and actual rates respectively

[ak2ary]

Follow up on caveat

Assume 60,000 made 9/15/11 not 1/1/10

2010 effective rate 6%

2010 actual rate 10%

1/1/10 PV of contribution = 60,000/ (1.06^(20.5/12)) = 54,315

Excess contribution = 54,315 - 15,000 = 39,315

True excess = 54,315 - 25,000 = 29,315

Excess due to prior PFB use = 10,000

Adjusted PFB @ 1/1/10 = PFB @ 1/1/10 - PFB used for MRC = 17,000 - 10,000 = 7000

Adjusted PFB @12/31/10 = 7000 x 1.1 = 7700

Excess contribution to add @12/31/10 = (29,315 x 1.06) + (10,000 x 1.1) = 31,074 + 11,000 = 42,074

PFB @ 1/1/11 = 7,700 + 42,074 = 49,774