QUESTION: I have coded and run, in ProVal, the valuation for my U.S. qualified plan. Now I need to do the valuation for the SERP, or excess, plan, which provides a benefit to replace the amount by which benefits are reduced by application of the U.S. Internal Revenue Code section 401(a)(17) compensation limit and the IRC section 415(b) benefit limit (i.e., provide a SERP benefit amount equal to “unlimited benefits minus limited benefits”, by using the qualified plan benefit formula as the SERP formula and removing the compensation and benefit limits).

ANSWER: As the following discussion indicates, there are three ways you can value the excess plan in ProVal.

Method 1 – Code the excess benefit in universal mode (this is the approach preferred by WinTech)

How To: Set up a Plan Definition in universal mode that directly values the excess benefit. The ProVal operators #MAXBEN and #MAXSAL are useful for this purpose.

For example, suppose your plan’s benefit formula is 1.5% x (final five years’ average pay out of the last 10) x service accumulated at decrement. The steps for coding the excess benefit in universal mode are:

1. Create a Custom Operator, #FASLimited, that limits each salary to the IRC 401(a)(17) maximum compensation amount.

2. Create two Accrual Basis Components , FAPUnlimited and FAPLimited, with rates of 1.5% for all years of service, and basis formulas of (5 #FAS 10) and (5 #FASLimited 10), respectively.

3. Write your benefit formula as follows, where x is the age to which the benefit is deferred:
   FAPUnlimited #zminus (FAPLimited #min #MaxBen x).

4. Use this Plan Definition for your Valuation and any Core Projection you may run.

Limitations: None

Advantages: All other features in ProVal’s universal mode are available and will produce correct results.

Method 2 - Subtraction outside ProVal

How To:

1. Set up a Valuation or Core Projection in ProVal’s universal mode with the same Plan Definition and assumptions as run in the U.S. qualified mode. (Valuation and Projection Assumptions identical to those used in U.S. qualified mode can be created by using the Populate button in the ProVal library entry for the assumption set.)

2. Run the Valuation or Core Projection. The result provides the plan’s unlimited liabilities.

3. Export these results and the results from the U.S. qualified plan Valuation or Core Projection to an outside software application (such as a spreadsheet file) and subtract the liabilities.

Limitations: Because ProVal does not know who has a non-zero non-qualified benefit, the future working lifetime output variable values in both Valuations, or Core Projections, are based on inclusion of all qualified plan participants. Furthermore, the (subtracted) net liabilities of the excess plan are not available for use by any other command in ProVal’s universal mode (e.g., a Valuation Set, forecast or exhibit).

Advantages: This method is simple and requires almost no set up time in universal mode.

Method 3 – Negative Scaling Factors

How To:

1. Create a copy of your U.S. qualified mode Valuation Assumptions but override the historical limits with very large numbers (e.g., 999,999,999).

2. Set up and run a Valuation or Core Projection, Run A, with all inputs identical to your U.S. qualified Valuation or Core Projection inputs, except reference this new set of Valuation Assumptions. This run will produce the unlimited liabilities.

3. Set up Scaling Factors that are all -1 except for the total salary, number of active members, number of inactive members and the future working lifetime numerator and denominator, for which you should set the scaling factors to 0.

4. Set up another Valuation or Core Projection, Run B, whose inputs are identical to your U.S. qualified Valuation or Core Projection inputs, but reference these scaling factors.

5. Aggregate Run A and Run B in Valuation Sets, Deterministic Forecasts, Stochastic Forecasts and when viewing results under the Output menu. Because of the negative scaling factors, this subtracts the limited liabilities from the unlimited liabilities.

Limitations: The resulting future working lifetime output variable value is for the entire population, not just for those eligible for an excess benefit. This may or may not have a material effect on liabilities.

Advantages: Set up is easy. Liabilities are available for use by all other commands in ProVal’s U.S. qualified mode.