New Plan with initial short year and PPA

[mwyatt]

Have had two different proposals run across my desk for newly established entities that are looking at DB plans.

Facts are:

Fiscal and plan years both will be maintained on calendar year basis; will be short year say of 10/1/2012-12/31/2012 respectively.

No past service so Shortfall Amortization bases not an issue (see in regs where prorate amortization payments for short plan year).

In old pre PPA days when we were dealing with say Individual Aggregate, would prorate Normal Cost for months of year. A little confused in the PPA world how to treat Target Normal Cost.

Looking at definition of Plan Years of Service in our document (which is a year of participation with 1000 hours of service), short plan year is dealt with by pro-rating hours requirement by month. So for funding purposes, would imply that our 3 month plan year would credit as 1 Year of Participation. So if salaries are such that dealing with 415 limit, could one use a Target Normal Cost equal to 1/10th of dollar limit? Seems like a much higher result than I would anticipate given a short plan year.

Any guidance?

[david rigby]

What is the accrued benefit on 12/31/2012? What is the accrued benefit on 10/01/2012 (zero)?

Seems to me that you use basic actuarial principles: TNC is the value of the increase in the accrued benefit (w/ proper discounting to BOY).

[mwyatt]

Well, let's take a hypothetical, assuming a high end owner. Document provides for accrual on plan year as participant and completed 1000 hours of service. Document (Relius BTW) states that if a short plan year, then the hours requirement is prorated by number of months. So assume plan starts 10/1/2012 and first short year ends 12/31/2012. My cursory reading of 415 regs seems to indicate no special rules for short plan years. The document states to me that for the 3 month period would be credited with a full year of participation, so the end of year accrued benefit for short year 1 could equal 1/10th of the 2012 dollar limit, or $1,666.66.

The 430 regs reference proration of Funding Shortfall bases to recognize a short year but is moot on Target Normal Cost. So could I in this circumstance have a Target Normal Cost based on 1/10th of the dollar limit for this iniital short year with no proration? Pre PPA all costs (bases and normal cost) were generally pro-rated.

[david rigby]

Pre PPA all costs (bases and normal cost) were generally pro-rated.

Under the Unit Credit funding method (PPA), do we care how long is the plan year? Or just how much benefit is accruing during the PY?