Reasonable Funding Methods

[Guest Ken Houck]

I am working on a new plan which bases benefits only on service since the inception of the plan. Can I determine the Accrued Liability using service from dates of hire or would this be deemed an unreasonable allocation between past and future liabilities? Note: I plan on using the FIL funding method and this would establish my initial base, but the question could apply to any funding method with a base, as well as to Full Funding limits.

[Larry M]

Yes, you can use an assumed entry date or entry age for funding purposes when using an entry age normal type of funding.

We quite often used an entry age which was the earlier of (a) actual age of hire, and (B) age xx (the latter depending upon the type of business and expected average future entry ages).

[Guest Brian4]

Some actuaries argue over this issue. I believe you can do what you Ken proposes. How entry age is defined is a part of the funding method. Rev. Proc 95-51, regarding automatic approval for changes to funding methods, allows two methods of defining entry age. Age at participation if plan always existed under current terms, or age when credited service starts.

For the unit credit method, the IRS says the pattern of benefit accrual should be followed for determing the accrued liability and normal cost.