Target Normal Cost Related to 415 Dollar Limit Increase

[Pension RC]

I am working on a 1/1/2012 valuation for a frozen plan. A few of the actives seem to be getting a target normal cost due to the fact that the 415 dollar limit is not as reduced at the end of the year, as they are closer to age 62. Is that possible? Moreover, I assume that none of them should be getting a TNC due to the increase in the dollar limit from $200,000 to $205,000, since, for the TNC, the same BOY dollar limit would be used at the end of the year. Is that correct?

Thanks very much for your help!

[Andy the Actuary]

Does plan provide that benefits are frozen except for changes in 415? If not, then frozen=frozen. Don't understand the getting closer to 62 business. Wouldn't we determine AB at NRD on freeze date and apply 415 at that time. Or, is the assumption that benefit can be paid immediately? In any case, first decide does frozen=frozen.

[Pension RC]

Thanks for your response. I'm looking over over a prior valuation and see the following footnote: "Plan is funded to a lump sum limited by 415. This funding assumption could result in a target normal cost for a participant with no increase in accrued benefit when there is an increase in the IRC 415 benefit." Do you know what case this could be referring to?

Thanks again!

[david rigby]

"Plan is funded to a lump sum limited by 415. This funding assumption could result in a target normal cost for a participant with no increase in accrued benefit when there is an increase in the IRC 415 benefit."

Sounds like the "freeze" does not include any increase in the 415 limit. Andy is correct: confirm first that this is what the plan provisions actually provide.

[Pension RC]

Thanks for your response, David. The freeze doesn't include any language providing for benefit increases due to an increase in the 415 limit. Therefore, there is no way for there to be a target normal cost - correct?

[david rigby]

Don't forget the different accrual minimums in 415: the 415 dollar limitation accrues over (minimum 10) years of participation, while the 100% of pay limitation accrues of (minimum 10) years of service. Does this affect your question about NC?

[Pension RC]

Yes. It does. So you are saying that there could be target normal cost in the frozen plan because a participant is doesn't yet have 10 years of service or participation, so the proration changes from the beginning of year to the end of year?