Average Compensation

[retbenser]

Given traditional DB plan with formula 5% of Average Comp x years of service.

Question1: Can averaging period = 1? (that is, no averaging)

Given fraction accrual rule. where accrued benefit = 5% x Average Comp (3 years) x min(25, total service) x (years of service / total service)

Question: in applying the formula, CAN you use "projected" average comp rather "current" average comp?

For example, given following comp: $100,000 $120,000 and $130,000.

Is "average comp" = $120,000 (average of current 3) or is it $130,000 (projected average 3)?

Thanks.

[Effen]

I don't think there is anything wrong with using a 1-yr average, just be careful of 415 limit, which is a 3-yr average by statute.

Question: in applying the formula, CAN you use "projected" average comp rather "current" average comp?

Not sure what you mean by this question. For what purpose are you "applying the formula"? If you are doing a ben calc, then you need to follow the document. If you are doing a valuation, then you can use a reasonable assumption of what you think comp will be under the plan definition at retirement.

[frizzyguy]

If you are doing a valuation, then you can use a reasonable assumption of what you think comp will be under the plan definition at retirement.

Can you only use pay projected for one year in this situation? I would think that is all that PPA would allow. I could definitely be wrong though. And to bring it a step further, is that only for the projected EOY benefit used for TNC and no projection for FT?

[Effen]

You are correct, however you still project to retirement for the At-risk liability and the determination of the maximum deductible contribution. I beleive that is a PUC calculation, not a UC.

[frizzyguy]

You are correct, however you still project to retirement for the At-risk liability and the determination of the maximum deductible contribution. I beleive that is a PUC calculation, not a UC.

Good call, I was only thinking of the basic calculations.

Bringing it back to the original question, if you are projecting one year, I would think you would use 110k for the average compensation in the BOY AB calculation. (Excluding the PUC calculation discussed above of course.) This of course is a plan where past compensation and service is excluded.

Then I think you would use 115k (average of 110k and 120k) for the EOY calculation to determine NC. Also, I would use a consistent salary increase assumption. We rarely use one on the plans I work with but when we use one we do a percentage increase. I am assuming that your example was just to discuss the mechanics but I figured I would throw that out there. I have never seen a flat dollar assumption but that doesn't mean they don't exist.