Cash Balance Plan - BOY valuation normal cost

[Hojo]

Sorry if this is simple, but it's Friday and my brain has stopped working.....

Suppose the following

1/1/2013 Valuation Date.

Hypothetical Account Balance as of 1/1/2013 = $5,000

IC = 4%

Pay Credit = 3%

If I'm doing the valuation during 2013 and I don't yet know the 2013 pay, how do I determine the Target NC? Do I look at last years pay and estimate the accrual of the pay credit plus the interest credit to get the accrual for the year?

I'm almost certain that's it (unless I have a salary scale in which case I would apply that for one year), but just need to check since I'm doubting myself.

[FAPInJax]

You will use either last year's compensation (with or without a salary scale) times the current pay credit percentage or a fixed dollar amount.

[My 2 cents]

My understanding of the funding rules for a cash balance plan under PPA is as follows:

The interest credit would not be considered to be part of the accrual for the year, having already accrued (interest for all future periods being an inherent part of each pay credit). Further, the Target NC would not be 3% of earnings, it would be the present value of the benefit expected (taking into account future interest credits on it) to result from the pay credit. The pay credit would be projected to increase with interest to each assumed decrement date, converted to a benefit in the payment form assumed as of each such date, and the resulting expected cash flow would be discounted using the mandated segment rates.

Similar projections are applied to the current balance to value the accrued benefit. The Funding Target will not equal the hypothetical balance unless you are assuming 100% termination rates and that all will immediately cash their benefits out. It is true that the plan can provide that the lump sum equivalent of the current balance equals the current balance, however.

[ubermax]

good stuff from 2 cents ; I've attached the final 2009 ppa regs & there's a nice cash balance example on page 53045 - the target normal cost calculation is similar to that of the funding target - the regs themselves provide a lot of good info.

E9-24284.pdf