PBGC Premium and Administrative Expenses
This topic pertains to payments from plan funds for items other than benefits, specifically administrative expenses (investment expenses are, presumably, deducted from investment return) and premiums paid to the U.S. Pension Benefit Guaranty Corporation (PBGC). Under the PBGC Premium and Administrative Expenses topic, or the Administrative Expenses topic in modes other than U.S. qualified pension (and for Cooperative and Small Employer Charity (CSEC) plans), you tell ProVal whether these expenses will be paid from plan funds, rather than from the corporation or business entity’s funds, how to compute the premium and/or administrative expense amount and the assumed timing of payment of these expenses within the plan year.
PBGC Premium parameters (U.S. qualified mode, except for CSEC plans)
The PBGC Premium parameters are used to compute, during execution of a Valuation Set or deterministic or stochastic forecast, the total PBGC premium, both per participant and (for single-employer plans) variable rate premium for the plan year(s) – regardless of whether any expenses or premiums are to be charged to plan funds. For official guidance with respect to PBGC premiums, and to determine the appropriate ProVal parameter settings for premium calculation, refer to PBGC Regulations and the instructions contained in the Premium Payment Package booklet published by the PBGC.
The PBGC premium is not calculated for Cooperative and Small Employer Charity (CSEC) plans (i.e., when the Apply Cooperative and Small Employer Charity (CSEC) rules box is checked for the "Pre-PPA" Applicable law selection) because the PBGC premium for CSEC plans is based on PPA law and ProVal's CSEC option is available only for minimum funding calculations under pre-PPA law. If PBGC premiums are paid from plan assets, particularly if you are forecasting, see PBGC premiums for plans or plan years not subject to PPA funding standards.
The first parameter indicates whether to Pay out of plan assets (during a forecast). Regardless of whether you check this box, ProVal will compute the PBGC premium as long as all Valuations in a Valuation Set or Core Projections in a forecast have calculated a PBGC liability. (Likewise, if a Valuation Set referencing this Asset & Funding Policy is selected under the Government Forms Extract command, if all referenced Valuations calculate the PBGC liability, then ProVal will export a check in the “Yes” box for the Schedule SB/MB question about attaching a schedule of active participant data.)
If you check the Pay out of plan assets (during a forecast) box, the actual (experience) plan cash flow will include the PBGC premium expense (i.e., the premium amount will be withdrawn from the fund) even if you do not check one of the Include in boxes: Funding normal cost and Accounting expense. In the determination of valuation liabilities at the initial (baseline) valuation date and each forecast valuation date thereafter, if the Funding normal cost box is checked, the premium expense is added to funding normal cost, including the target normal cost computed pursuant to the Pension Protection Act of 2006 (PPA) under either a “PPA” or “Pre-PPA and PPA” law selection. Similarly, in the determination of accounting obligations, if the Accounting expense box is checked, the premium expense is added to accounting service cost.
Check the Reflect MAP-21 provisions box (not available for the “Pre-PPA” law selection), to reflect the premium rates specified by the Moving Ahead for Progress in the 21st Century Act (MAP-21), for plan years beginning in 2013 and later. For “PPA” and “Pre-PPA and PPA” law selections, check the Reflect Bipartisan Budget Act of 2013 box to reflect the premium rates and variable premium cap specified in the law for plan years beginning in 2015 and check the Reflect Bipartisan Budget Act of 2015 box to reflect the premium rates and variable premium cap specified in the law for plan years beginning in 2017. For "Multiemployer" law selections, check the Reflect 2014 Multiemployer Pension Reform Act provisions to reflect the premium rates in the law for plan years beginning in 2015. Note that, under these laws, ProVal reflects the indexation of premiums to wage growth by applying the increase rate(s) specified in the Projection Assumptions for National Average Wages (NAW).
For the “PPA” and “Multiemployer” law selections, you may provide, as an entry for the Override participant count, a total number of active and inactive plan participants to be used only for purposes of calculating the PBGC flat rate premium. If an override is not provided, ProVal will use the head count as determined in the underlying Valuation(s) or Core Projection(s). In a forecast, when a participant count override is present, the participant count at each future valuation date will be the head count determined by ProVal at that valuation date multiplied by the ratio of the override participant count entered to the head count determined by ProVal at the initial (baseline) valuation date.
Under all law selections except “Multiemployer”, there is a check box to indicate whether the plan is Eligible for small plan cap on variable rate premium for the current year or, in a forecast, for the baseline year. If this box is not checked, the small plan cap will not be applied, either in a Valuation Set or for any year in a forecast. If it is checked, the small plan cap will be applied in a Valuation Set and for the baseline year of a forecast and will be applied also for future forecast years for which the active participant head count does not exceed 25.
For the “Pre-PPA” law selection, you may Reflect the flat rate premiums, for plan years beginning in 2006 and later, under the Deficit Reduction Act of 2005 (e.g., $30 per participant increased with National Average Wage inflation for single employer plans). If the box is unchecked, ProVal will reflect the premium rates specified by prior law (e.g., $19 per participant).
For single-employer plans for plan years prior to the plan year in which the PPA funding rules take effect (that is, the law selection is either “Pre-PPA” or “Pre-PPA and PPA”), the Variable Rate Premium Calculation parameters provide details needed to calculate the variable rate portion of the premium. Specifically:
A check in the Reflect 2007 updated mortality tables box indicates that, because the Internal Revenue Service has prescribed new mortality tables to be used to determine current liability, the variable rate premium should be calculated using the market value of assets (instead of the actuarial value of assets). If the box is checked, ProVal uses market value for plan years beginning on January 1, 2007 or later. Furthermore, in a Stochastic Forecast, ProVal will develop the PBGC variable rate premium based on interest rates that are 100%, rather than 85%, of simulated corporate bond rates. Note that checking this box affects only the PBGC premium calculation and has no impact on the calculation of current liability, which will reflect the new mortality tables if specified for current liability in the Valuation Assumptions or if a Current Liability Mortality Change Type of Event has been created in the Valuation Set.
A check in the Last year's contribution constrained by Full Funding Limitation box indicates that the plan is exempt from payment of the variable rate premium for the current plan year, generally because it had hit the Full Funding Limitation the prior year. This parameter is available to be rolled forward during an update of the Asset & funding Policy.
A check in the Alternative Calculation Method (ACM) box tells ProVal to calculate the premium under the ACM, as well as under the General Rule, and select the smaller of the two values as the variable rate premium amount for the plan year(s). (If this box is unchecked, ProVal will apply only the General Rule.) To use the ACM in a Valuation Set or in a forecast, you must furnish additional information about the prior plan year. The parameters that provide this information are contained in the Alternative Calculation Method Parameters dialog box, which you access by clicking the Parameters button.
In the Alternative Calculation Method Parameters dialog box, enter the Assumed Retirement Age, which is used to adjust the value of vested plan benefits from the current liability interest rate basis to the required interest rate basis. This assumed retirement age is used for all years in a forecast. Under Information for Prior Plan Year, enter the Current Liability Interest Rate (BIR), used to calculate the value of vested plan benefits as of the beginning of the prior plan year. Also enter the Plan Value of Vested Benefits at BIR for both Retirees/beneficiaries receiving payments and Participants not receiving payments, both computed as of the beginning of the prior plan year, at the prior plan year current liability interest rate. If you take these values from the prior plan year’s ProVal Valuation Set Exhibits, note that ProVal determines whether inactive participants are currently receiving payments by reference to the setting (either Payment form or Status code) for the Benefits in receipt split based on parameter of the Prior Year Values topic. Enter the prior year Adjusted Value of Plan Assets, calculated in accordance with the PBGC instructions for Schedule A. Except for the Assumed Retirement Age parameter, these parameters are available to be rolled forward during an update of the Asset & Funding Policy.
See the discussion under the PBGC Variable Premium Liability topic of Valuation Assumptions for details about the methodology of calculation, during the Valuation (or, in a forecast, the Core Projection) run, of the variable premium liability on which the variable rate portion of the premium is based.
Administrative Expenses parameters
The Administrative Expenses parameters specify your assumptions about expenses paid from plan funds. If a dollar amount of administrative expense is assumed charged to plan funds, enter the amount in Dollars that is assumed charged in the baseline year of the forecast (i.e., year beginning on the baseline Valuation Date). In subsequent forecast years, ProVal will increase this amount for inflation before deducting it from plan funds. If the expense assumption is expressed as a percentage of the market value of plan assets, enter the Fraction of assets that the fund should be charged annually. You may specify both a flat dollar amount and a fraction of the asset value as administrative expenses paid from plan funds. If no administrative expenses are paid from plan funds, zeros should be entered for both parameters.
Indicate whether to Include the assumed administrative expenses in either Funding normal cost and/or Accounting expense. In the determination of valuation liabilities at the initial (baseline) valuation date and each forecast valuation date thereafter, if the Funding normal cost box is checked, both the dollar amount and the fraction of assets amount are added to funding normal cost, including the target normal cost computed pursuant to the Pension Protection Act of 2006 (PPA) under either a “PPA” or “Pre-PPA and PPA” law selection. Similarly, in the determination of accounting obligations, if the Accounting expense box is checked, both 1) the dollar amount and 2) the amount indicated by the fraction of assets entered are added to accounting service cost. If the Accounting expense box is checked, the Override dollar amount box becomes accessible; if this box is unchecked, the amounts indicated by the Dollars and Fraction of assets parameters will be the assumed administrative expense amount included in accounting expense (i.e., same amount as in funding cost). To specify a different amount to be added to accounting service cost, check the box and enter the total amount of administrative expense to include in accounting expense.
To round expense amounts included in funding normal cost or accounting expense separately from other rounding, check Round amounts included in normal cost/expense to and select a rounding quantity. Note that this only rounds expense loads included with funding normal cost or accounting expense. Actual expense amounts will still flow through assets in a forecast.
In the Canadian registered pension mode, enter the dollar amount of any Solvency wind-up expenses that should be subtracted from the market value of assets in the development of solvency assets as of the Valuation Date. In subsequent forecast years, ProVal will increase this amount for inflation before deducting it from assets.
Current Liability Full Funding Limitation parameter (U.S. qualified mode)
Except for the “PPA” law selection, if you check either the box to include administrative expenses in funding cost or the box to include PBGC premiums in funding cost, the For current liability full funding limit calculation, include in parameter becomes accessible. Select the methodology you wish ProVal to use to compute the current liability full funding limit, including calculation of the end-of-year unfunded current liability for the (single-employer plan) additional funding charge:
Liability projection, to add the dollar and fraction of assets amounts of assumed administrative and premium expense to the current liability normal cost, thus reflecting the total, or gross, current liability normal cost, rather than just the “plan benefit” or net (of expenses) normal cost, in the end-of-year current liability. This is the treatment used elsewhere in ProVal to develop current liability normal cost if any expenses (whether administrative or PBGC premium expense) are assumed paid from plan funds.
Asset projection, to i) exclude the dollar and fraction of assets amounts of assumed administrative and premium expense from the current liability normal cost, thus reflecting in the end-of-year current liability just the “plan benefit” or net (of expenses) current liability normal cost, and ii) subtract that expense from the beginning of year asset value, thus reflecting payment of expenses from plan funds at the beginning of the year, on the same date as when the expenses are “charged” to the plan (i.e., included in plan liabilities). Generally, an exact offset (or “wash”) will not be produced in the end-of-year current liability full funding limit or unfunded current liability, because different interest rates are used to roll the current liability and the assets to the end of the year and, furthermore, only 90% of current liability, versus 100% of assets, is included in the (RPA) current liability minimum full funding limit.
Payment Timing
Enter the Fraction of year from Valuation Date to average date expenses are paid. ProVal assumes that disbursements for administrative expenses and PBGC premiums paid from plan funds are made on the date derived by adding this fraction to the Valuation Date entered under the Initial Asset Values topic. Values between 0 (disbursement is made at the beginning of the year) and 1 (disbursement is made at the end of the year) are permitted. Note: this timing is applied to cash flow, i.e, experience expense payments, not to anticipated expenses included in valuation liabilities (which are added to normal cost without adjustment).