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Contribution Policy

The Contribution Policy topic contains parameters that pertain to:

  1. the actuarial cost method applied to determine

  1. the employer’s strategy, or policy, for making contributions to the plan for the current year and for future years of a forecast period;

  2. relevant conditions, including

  1. options for employer contribution timing;

  2. in the Canadian registered mode, adjustments to the normal cost and definition of the solvency liability amortization interest rate; and

  3. in the universal mode, application of international funding rules, including country-specific rules.

Note that the specifications you make under the Contribution Policy topic have an effect on accounting expense calculations to the extent that funding contributions affect such expenses. For valuations, anticipated contributions have an impact on the expected return on plan assets. For forecasts, the actuarial cost method, coupled with the plan sponsor’s contribution policy, will affect the future value of plan assets, which, in turn, impacts accounting expense.

These six groups of parameters are discussed in the following sections of this article.

 

Actuarial Cost Method

Note that, in the U.S. qualified mode, the specified actuarial cost method is used to calculate ERISA minimum required and maximum tax deductible contribution limits in valuations performed for single-employer plans for years before the funding rules of PPA take effect and for multiemployer plans for valuations performed for all years regardless of whether the PPA funding rules have taken effect. For the “PPA” applicable law type, the specified actuarial cost method is used to calculate actuarial liabilities but not target liabilities.

ProVal provides a choice of the traditional types of Actuarial Cost Method: unit credit, projected unit credit, entry age normal, aggregate, individual aggregate and the two standard types of frozen initial liability (i.e., initial accrued liability determined under either the entry age normal or the unit credit cost method) and also offers a choice of frozen initial liability methods under which the initial accrued liability is determined under the projected unit credit cost method. In the Canadian registered, U.S. public and universal pension modes, ProVal also offers three attained age cost methods, two of them aggregate methods and one an individual attained age method; under these cost methods, the accrued liability is determined based on the projected unit credit cost method and the normal cost is determined as the present value of future normal costs for all active participants spread over the present value of future salaries (or future working lifetimes). For all methods except unit credit, projected unit credit and the individual attained age method, ProVal offers both a level percent of salary and a level dollar variation. Specifically, the options are:

Five of these cost methods are “individual” methods (aka immediate gain recognition methods) that directly calculate the normal cost and accrued liability at each valuation date as the sum of the normal cost and accrued liability, respectively, for all participants. The five methods are: unit credit (a.k.a. pure unit credit), projected unit credit, the percent of salary and level dollar variations of entry age normal, and attained age percent of salary. Normal cost and accrued liability under these methods are defined as follows:

Ten of the cost methods are “aggregate” methods (aka spread gain recognition methods) that do not directly calculate the accrued liability at each valuation date. Instead, they calculate a frozen initial (accrued) liability (or FIL), from which the asset value is subtracted to determine the initial unfunded accrued liability (initial UAL or unfunded FIL). The initial UAL is then “brought forward” to succeeding valuation dates, i.e., increased by the prior year’s normal cost and decreased by contributions for the prior year, all with interest to the valuation date. By definition, the initial UAL and the UAL each year thereafter are zero for the aggregate and individual aggregate cost methods.

These ten ”aggregate” methods are the percent of salary and level dollar variations of: attained age normal frozen initial liability (a.k.a. frozen attained age), entry age normal frozen initial liability (a.k.a. frozen entry age), aggregate, individual aggregate, and frozen initial liability with projected unit credit. For these methods, except for the individual aggregate method, the normal cost is not the sum of each active participant’s normal cost but is determined in the aggregate. For the individual aggregate method, the normal cost is the sum of the individual “normal costs” for each active participant.

The formula used to calculate an individual normal cost under the individual aggregate method or an aggregate normal cost under the aggregate, frozen attained age and frozen entry age methods is:

image/ebx_1004442295.gif

Where

PVFB = Present Value of Future Benefits,

PVFEECONT = Present Value of Future Employee Contributions,

AVA = Actuarial Value of Assets,

UAL = (Frozen) Unfunded Accrued Liability brought forward,

PVFS = Present Value of Future Salaries (or of future working lifetimes if cost method is level dollar), and

ValSal = Valuation Salary (or valuation number if cost method is level dollar), i.e., current year salary (or life count) of active members under 100% retirement age on the valuation date.

For the individual aggregate method, the individual normal cost is zero for each inactive participant and is calculated for each active participant according to the formula, using for AVA the assets allocated to the participant. First, assets equal to each life’s PVFB are allocated to each inactive life; then the remaining assets are allocated to active lives, in proportion to the selected asset allocation basis. However, the final asset allocation may differ, if necessary to avoid negative normal costs. That is, if the calculated normal cost for an active record is negative (before addition of any assumed administrative expenses and/or term cost for any benefits valued under the term cost method), the normal cost is set equal to zero (and then assumed administrative expenses and/or term costs are added) and assets are reallocated. A detailed calculation of normal cost (on both the minimum and maximum contribution bases in the U.S. qualified mode) for each active participant is available in the Valuation Set Exhibits. (See the discussion of Individual Aggregate asset allocation, under the Liability Methods topic of Valuation Assumptions, for details.)

In the U.S. qualified mode, for the aggregate and individual aggregate methods, the total plan AVA is adjusted, in accordance with Internal Revenue Service (IRS) Regulations and Revenue Procedures, to determine the normal cost for the minimum required and maximum tax deductible contributions. For the individual aggregate method, the total adjusted AVA remaining after allocation to inactive participants is then allocated to each active participant (for the U.S. qualified mode, again, in accordance with IRS Regulations and Revenue Procedures) in order to determine the active participant’s normal cost. If the normal cost for an active participant is negative, it is increased to zero.

For the frozen attained age or frozen entry age methods, if a new unfunded accrued liability base is determined (for example, for a change in plan or actuarial assumptions), it is equal to the change in the pure unit credit or the entry age normal accrued liability, respectively. If the method needs to be restarted due to a negative normal cost, the UAL is set equal to the UAL recalculated under the cost method used to determine the (frozen) initial accrued liability (and any additional bases).

ProVal’s FIL with PUC option is a hybrid method; it does not calculate normal cost under the standard (“fresh start”) aforementioned formula. The normal cost under this method is determined as:

image/ebx_1891237679.gif

where the variables are as defined above, plus

NCPUC = Normal Cost under the projected unit credit method, and

ALPUC = Accrued Liability under the projected unit credit method.

For the FIL with PUC method, if a new unfunded accrued liability base is determined, it is equal to the change in the projected unit credit accrued liability. If the method needs to be restarted due to a negative normal cost, the UAL is set equal to the UAL recalculated under the projected unit credit cost method; therefore the normal cost becomes the unadjusted projected unit credit normal cost.

The two aggregate attained age methods are also hybrid methods. They have the same accrued liability as the projected unit credit method. The normal cost is defined as the normal cost rate multiplied by the valuation salary or valuation number (depending on whether the method variation is percent of salary or level dollar). However, the normal cost rate is not determined individually for each active participant; instead it is determined (in the aggregate) for the plan in total, as the sum of the present value of future normal costs for all active participants divided by the present value of future salaries, or future working lifetimes, for all active participants. The normal cost is thus:

image/ebx_-2028995707.gif

where the variables are as defined above, plus

n = number of active plan participants under 100% retirement age on the valuation date.

When selecting an actuarial cost method in U.S. qualified mode for valuations performed for single-employer plans before the date that the funding rules of PPA take effect and for valuations performed for multiemployer plans, consider whether the selection constitutes a change in cost method requiring IRS approval. Although some of ProVal’s choices of cost method may be granted automatic approval by the IRS under certain conditions, others, such as FIL with PUC, cannot be adopted unless application is made to the IRS for approval. See IRS Revenue Procedures, Notices, Regulations and any other relevant pronouncements for guidance.

In the U.S. qualified mode, if a cost method that does not directly calculate an accrued liability is selected (i.e., one of the ten “aggregate” methods), then ProVal calculates the normal cost and accrued liability for the ERISA (actuarial liability) full funding limitation under the entry age normal cost method, in accordance with IRS Regulations and Revenue Procedures.

Except in the U.S. qualified and Canadian registered pension modes, you may check the Apply Full Funding Limit box to limit the contribution otherwise calculated under the selected actuarial cost method to the extent necessary to prevent the actuarial value of assets from exceeding the sum of the accrued liability and normal cost determined under the actuarial cost method. Thus you may prevent the generation of an employer contribution so large that it puts the plan into a “surplus” position.

In the U.S. qualified mode, you may apply a full funding limit for a plan of a tax-exempt entity. The relevant parameters are found under this (Contribution Policy) topic for a “PPA” law selection: see the discussion (below) in the “Relevant Conditions, Additional Constraints and Adjustments” section of this article. For all other law selections, the relevant parameters are found under the Bases Supporting Maximum Contribution topic.

In the universal mode, you may check the Apply international funding rules box to calculate plan cost under the rules of a specified Country (other than the U.S. and Canada). Currently, options are available to specify Brazil and the Netherlands. If you select the Netherlands, click the Country Parameters button to access parameters that further define plan cost calculations. Details of coding these parameters are provided (below) in the separate discussion of international funding rules.

 

Contribution Policy

Select the plan sponsor’s Contribution Policy, which specifies the basis for determining the amount of employer contributions that actually go into the plan’s investment fund each year, including future years of a forecast. To see how ProVal reflects the contribution policy to generate the total employer contribution for the plan year, select the Development of Employer Contribution exhibit under the Valuation Set Exhibits or the Deterministic Forecast Exhibits commands.

The contribution policy may or may not be related to the actuarial cost method selected. For example, if you select the “Normal Cost + Supplemental Cost” option, the actuarial cost method will be used to compute the two components of this amount. However, if you specify the entry age normal actuarial cost method but indicate that contributions will be a constant percentage of salary (e.g., 4%), then the cost method has no direct bearing on calculation of the actual contribution amount.

During a forecast, ProVal will attempt to generate employer contributions according to the contribution policy you specified. However, in the U.S. qualified and Canadian modes, if the selected contribution policy is neither the statutory minimum option nor the tax deductible maximum option, the actual employer contribution amount, nonetheless, will be constrained to fall within the range defined by the minimum required and maximum tax-deductible contribution amounts.

ProVal provides the following Contribution Policy choices:

If the selected Actuarial Cost Method is one of the six methods with a frozen initial liability, depending on the mode and, in U.S. qualified mode, depending on the law selection, some employer contribution policies might not be supported. In the U.S. qualified mode, under the PPA law selection, and in all other modes except Canadian registered, only the "Normal Cost + Supplemental Cost" policy is supported, with one exception: if the selected accounting standard is GASB 25/27 (Public mode) or GASB 43/45 (OPEB mode), the other contribution policies are supported. In the Canadian registered mode and for other law selections in U.S. qualified mode, all contribution policies are supported. If "Normal Cost + Supplemental Cost" is selected, closed amortization must also be selected (open amortization is not allowed for methods with a frozen initial liability).

Note that if Reflect contribution schedule. further discussed below, is selected, the specified Contribution Policy will be honored in a forecast only after the initial valuation year. When a contribution schedule is used in the U.S. qualified or Canadian registered modes, the year 0, or baseline year, contribution policy is assumed to be the Statutory Minimum plus any specified Additional Contribution.

If the Accounting Expense option is chosen, ProVal sets the employer contribution paid for the plan year equal to the net periodic pension cost or pension cost (in OPEB mode, benefit cost) for the fiscal (tax) year ending in the plan year. Accounting expense is determined as of the end of the tax year; hence this contribution policy will produce contributions and expense that appear to be equal only if contributions are assumed to be made at the end of the tax year. To code this assumption, enter a Timing of contributions parameter (see the discussion below) indicating a contribution paid at the end of the (plan) year and enter a measurement date equal to the valuation date. Note that if your parameter entries indicate a contribution made before the end of the tax year, then ProVal will calculate, and assume paid, a contribution equal to the expense discounted by the expected rate of return on assets from the end of the tax year to the earlier contribution payment date.

If the Percentage of Payroll option is selected, clicking the Additional Parameters button accesses a dialog box in which you enter the percentage(s). If you wish to assume that the employer contributes the same percentage of payroll each year, select the Constant option and enter the desired percentage (not a decimal fraction – for example, enter 5, not 0.05, for an annual 5% of payroll contribution). To assume an annual employer contribution that varies over the forecast period (for example, 5% of payroll the baseline year of the forecast, 6% the next year and 7% thereafter), select the Variable option and complete the spreadsheet. Enter the desired percentages and the calendar years to which they apply. To code our example, if the plan year is a calendar year and the baseline Valuation Date is 1/1/2007, enter 5, 6 and 7 in the first three rows of the Payroll % column and enter 2008 and 2009 in the second and third rows of the From column. (Note: the From box in the first row cannot be completed.) The spreadsheet will look like:

From To Payroll %
-- 2007 5
2008 2008 6
2009 -- 7

ProVal fills in the To column automatically and the last percentage will be used for the last year entered and all years thereafter. Similarly, if your baseline Valuation Date is prior to 1/1/2007, the first percentage would be used for years prior to 2007. Thus, our sample payroll percentage settings will produce a 2007 employer contribution of 5% of the 2007 payroll, a 2008 employer contribution of 6% of the 2008 payroll and employer contributions in 2009 and later years that are 7% of the payroll each of those years. Our example involved only three payroll percentages: if your scenario has several payroll percentages, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet. Note that the percentage(s) apply to total salary for the plan year, not to the valuation salary (which amount will be less than the amount of total salary if there are any active participants for whom there is no normal cost). This contribution policy option, when used in conjunction with the Additional Contribution parameter (discussed below), is particularly useful for prescribing a contribution that is a flat dollar amount: that is, enter 0 as a constant percentage of payroll and enter the desired contribution amount for the plan year under the Additional Contribution parameter.

Check Include administrative expenses to add administrative expenses to the calculated percentage of payroll contribution amount. In US Qualified mode, check Include PBGC premiums (if paid out of plan assets) to also add the PBGC premiums. 

In the U.S. public mode, besides the percentage of payroll, you may also check the Calculate Funding Period Amortization Assumptions box, to have ProVal compute the number of years over which the specified percentage of payroll contribution must be made in order for the current unfunded liability (i.e., as of the valuation date) to be fully amortized, assuming that the normal cost rate remains constant over the funding period. The funding period will be calculated only for immediate gain recognition (not spread gain recognition) actuarial cost methods. If this box is checked, ProVal assumes that the employer contribution each plan year is paid according to the indicated Payment frequency and Payment timing. For Payment frequency, the payments are assumed to be equally spaced throughout the year. Select Annual for one payment; Semi-annual for two; Quarterly for four; Monthly for twelve; Bi-weekly for twenty-six; or Continuous for an infinite number of payments during the year. For Payment timing, choose either the Beginning of the period or the End of the period. (Note: If more than 100 years is needed to fully amortize the unfunded liability, ProVal displays "100" for the Funding Period Output variable.)

If the Defined by Participant in Plan Definition option is selected, the preliminary contribution, prior to any Additional Contribution or minimum/maximum constraints discussed below, is the total of the Contribution Policy Data values defined in the Plan Definition and calculated in the underlying valuations or core projections. This feature might be used, for example, if the employer contribution is legally defined formulaically based on characteristics of the covered active population, such as a multiple of hours worked that varies by division. Click the Additional Parameters button to define a multiple to be applied to the Contribution Policy Data amount. If you wish to assume a single multiple for all years, select Constant and enter the desired multiple. To assume a multiple which varies over the forecast period, select Variable and enter the desired multiples and the calendar years to which they apply. Check Include administrative expenses to add administrative expenses to the calculated contribution amount. In US Qualified mode, check Include PBGC premiums (if paid out of plan assets) to also add the PBGC premiums. 

If the Multiple of expected employee contributions option is selected, clicking Additional Parameters accesses a dialog box in which you enter (as a decimal number) the Multiple of expected employee contributions. For example, if employer contributions are 200% (i.e., two times) the expected employee contributions, enter 2. (For details about calculation of expected employee contributions for the plan year, see the Technical Reference article “Employee contribution methodology ”.) Check Include administrative expenses to add administrative expenses to the calculated contribution amount. In US Qualified mode, check Include PBGC premiums (if paid out of plan assets) to also add the PBGC premiums. 

The Additional Parameters button also is accessible if you select the Funded Ratio-Dependent option (OPEB mode) and it provides access to the parameters needed to determine the contribution paid each plan year. The Funded Ratio Basis indicates how to compute the Assets and Liability used in the ratio of assets to liabilities. You may choose the market value (either accounting or funding value) of assets, the market-related value or the actuarial value. You may set the liability value equal to either the actuarial liability under the actuarial cost method, the present value of future benefits, the accumulated postretirement benefit obligation or the expected postretirement benefit obligation. For each plan year, ProVal computes the funded ratio, i.e., the ratio of assets to liabilities, and compares this ratio to the specified Lower Funded Ratio and Upper Funded Ratio. If the plan’s funded ratio is less than the lower funded ratio, then the contribution paid is assumed to be the specified Flat Dollar Contribution amount plus benefit payments and expenses for the plan year. If the funded ratio is at least the lower funded ratio but less than the upper funded ratio, then the specified Flat Dollar Contribution amount is assumed paid. Lastly, if the funded ratio is equal to or exceeds the upper funded ratio, then $0 is assumed paid. Note that the lower and upper funded ratios are entered as percentages (e.g., 30% is coded as 30, not 0.3).

The Normal Cost option indicates that the employer contribution for each plan year will be the normal cost (i.e., total normal cost minus employee contribution normal cost, if any) under the selected Actuarial Cost Method, including term cost (if any) and any expenses, and PBGC premiums in U.S. qualified mode, included in funding cost. In the U.S. qualified mode, for law selections other than “PPA”, and in the Canadian registered mode, the normal cost presumed paid is the minimum funding basis normal cost.

The Normal Cost + Supplemental Cost option indicates that the employer contribution for each plan year will be the normal cost (determined as for the Normal Cost option) plus a payment to amortize the unfunded liability (determined under the selected Actuarial Cost Method). In most modes of operation, the Funding Amortization Bases topic contains the parameter settings that determine the amortization periods and payment amounts for each supplemental base that has an existing unfunded liability on the Valuation Date and for any bases created in the future. In the Canadian registered and U.S. qualified modes, however, selection of this option makes accessible the Additional Parameters button, which leads to parameters to specify the amortization basis to be used for the plan sponsor’s contribution policy. For example, in the U.S. qualified mode under the "Multiemployer" law selection, the intent may be to pay off an active benefit (plan) change amortization base over 12 years, in contrast to the ERISA minimum and maximum amortization periods of 15 and 10 years, respectively. Similarly, in the Canadian registered mode, the intent may be to pay off the amortization bases over a shorter time period than is specified under the Minimum Funding Amortization Bases topic. 

In U.S. Public mode, the Additional Parameters button also is accessible if you select the Normal Cost + Supplemental Cost  and it provides access to parameters for Rate-Setting Years and Interest. Check Specify contribution rate-setting years to set the contribution rate as a percent of valuation payroll in specified years. This contribution rate will be applied to valuation payroll until the next rate-setting year. Enter the most recent rate-setting Year, not later than the valuation year, and frequency thereafter to reset the contribution rate. If the Valuation Year is not a rate-setting year, enter the Initial rate set in the most recent rate-setting year. Note that new closed amortization layers are only created during rate-setting years. Also, the rate will always re-set in a year when there is a plan amendment. Specify how Interest should be applied to the normal cost plus supplemental cost. The options are Do not apply interest, Apply interest to payment timing date, or Apply interest to payment timing date, not past end of year. The two options with interest are equivalent unless the Fraction of year from Valuation Date to end of Plan Year is greater than one.

If the Pay As You Go option is selected, ProVal assumes that the employer pays contributions equal to the fund disbursements for the plan year, i.e., benefit payments plus any administrative expenses (including, in the U.S. qualified mode, any PBGC premiums) assumed to be paid from plan funds. Furthermore, ProVal assumes that the employer contribution is made at the time of the disbursements. Hence, because benefit payments are assumed made at the middle of the year, employer contributions, including any specified additional contribution (in excess of the amount needed to cover benefit payments), are assumed made at the middle of the year. 

Generally, in the U.S. qualified and Canadian registered pension modes, regardless of your selection of a Contribution Policy option listed above, ProVal will constrain the total annual employer contribution to fall within the range defined by the minimum required and maximum tax deductible contribution amounts. Thus ProVal will override the Contribution Policy parameter choice and set the employer contribution equal to the minimum required or maximum tax deductible contribution amount, if necessary to comply with statutory requirements and keep the contribution fully tax deductible in the current year. Thus, in a forecast, a plan is not permitted to have an unpaid statutory minimum required contribution (MRC) from the prior plan year at any forecast valuation date.

However, there are three exceptions to constraining the current year contribution to fall within the minimum/maximum range:

  1. For purposes of the Government Forms Extract command (U.S. qualified mode), if the Schedule Date is on or after the last day allowed to make a contribution that is reflected in the current plan year Schedule B, Schedule SB or Schedule MB (e.g., September 15th for a calendar year plan year), no final contribution will be added. Thus if current year contributions entered in the Contribution Schedule are insufficient to meet statutory minimum requirements, an accumulated funding deficiency or unpaid MRC is produced.

  2. ProVal might not increase the plan year contribution to the statutory minimum, in the U.S. qualified mode, under a “Multiemployer” applicable law selection, if the Allow an accumulated funding deficiency box is checked (see the discussion of this parameter below). In that case ProVal will not require an employer contribution at least as large as the minimum required contribution. However, if a Contribution Schedule is reflected (see the discussion below), ProVal will add a final contribution amount to the schedule, to attain a total employer contribution for the plan year equal to the statutory minimum required contribution – with the exception noted above for the Government Forms Extract command.

  3. ProVal may permit the plan year contribution to exceed the currently deductible maximum contribution amount (U.S. qualified and Canadian registered modes), if a Contribution Schedule is reflected. ProVal will not override the amounts indicated by the schedule as actually contributed, even if the resulting amount exceeds the maximum tax deductible amount for the current tax year.

The remaining contribution policy options apply only to the U.S. qualified or Canadian registered pension modes. The three statutory minimum options indicate that contributions in all plan years will be based on the minimum required amount according to the applicable statute. The statutory maximum option indicates that contributions in all plan years will be based on the maximum tax deductible limit according to the applicable statute.

In all modes, the Additional Parameters button provides access to parameters that specify details of some of the options. These details are discussed above, as relevant for each Contribution Policy parameter option.

In U.S. public mode, to use the selected Contribution Policy to determine the preliminary contribution for a future plan year, check the Apply lag period box and click the Parameters button. Select either One year or Two years for the Lag Contribution Policy for parameter, according to how many years the preliminary contribution will be delayed. Next indicate whether this contribution is to be Based on a Percentage of payroll or a Calculated dollar amount:

Note that any adjustments to the preliminary contribution, such as the contribution constraints, No contribution if funded ratio is greater than and/or an Additional Contribution (discussed below), the full funding limit (discussed above) and an end-of-year additional contribution, are not lagged to a future year and thus are reflected in the current year.

Generally, as relevant according to the Contribution Policy parameter setting, constraints may be applied to limit the contribution. You may Apply constraints based on: 1) a percentage of total payroll, 2) a percentage of valuation payroll, or 3) a dollar amount. Constraints may apply as a minimum and/or as a maximum. Enter a percentage, not a decimal fraction, for example, 6, not 0.06, for 6% of payroll. Note that if using a dollar amount for the constraint basis, the dollar amount will be held constant during a forecast.

When calculation of an end of year additional contribution to meet a funding target has been selected, these constraints are useful for limiting (what might be) very volatile contributions, subject, of course, to any statutory constraints. 

The contribution constraints are applied to the sum of only:

  1. the employer contribution amount determined by the selected contribution policy and

  2. the additional end of year contribution amount needed to meet a target funded ratio (if calculation of such amount has been selected).

If the No contribution if funded ratio is greater than is selected, the Parameters button will be accessible. The funded ratio amount may be a constant for all years or calendar-year dependent. The From-To-Funded Ratio% structure is similar to that described above for the Percentage of Payroll contribution policy. Define the funded ratio by choosing a liability. For funding liabilities, Market or Actuarial assets may be selected. Market or Market-Related assets may be chosen for an accounting liability.

Any amount specified by the Additional Contribution parameter (discussed below) is not subject to the contribution constraints or the No contribution if funded ratio is greater than policy and thus may be contributed regardless of these limits.

In the U.S. qualified mode, under a “Multiemployer” applicable law selection, for Contribution Policy parameter settings other than “Statutory Minimum”, “Statutory Minimum + Credit Balance” and “Tax Deductible Maximum”, the Allow an accumulated funding deficiency check box is accessible, to permit a total employer contribution for the plan year less than the statutory minimum required contribution amount. An additional contribution will be added to keep the assets no less than zero unless you check Do not make additional contributions to avoid assets becoming negative. Note that no asset return will be assumed if assets are negative. Allowing the asset value to project to a negative amount is useful if determining if the plan will become insolvent.

Relevant Conditions, Additional Constraints and Adjustments

These parameters further define the actual employer contribution developed from the specified actuarial cost method and employer contribution policy.

You may specify an Additional Contribution for the current plan year (in a forecast, the baseline year). ProVal adds this amount to that determined by the Contribution Policy parameter, and to any amount computed to meet a funding target indicated by the Calculate end of year additional contribution parameter of the Forecast Analysis topic, to derive the total employer contribution paid for the year. In the U.S. qualified and Canadian registered pension modes, ProVal will reduce this total contribution amount as necessary to avoid payment of a contribution in excess of the maximum tax deductible amount for the year (for the tax year, in the U.S. qualified mode). Note that if a Contribution Schedule is reflected, ProVal will add the specified additional contribution to the amount entered in the schedule to derive the total employer contribution paid for the year (in a forecast, for the baseline year), subject to the maximum tax deductible limit on the contribution amount for the tax year. To enter additional contributions for forecast years after the baseline year, see the relevant topics of Deterministic Assumptions or Stochastic Assumptions. For forecast years after the baseline year, the Additional Contribution may be an amount or a target. If it is a target, the Additional Contribution will be the amount necessary to reach the target. ProVal adds an additional contribution amount to the amount generated according to the setting of the Contribution Policy parameter and to the amount computed to meet a funding target indicated by the Calculate end of year additional contribution parameter when it derives the total employer contribution paid for each forecast year; in the Canadian and U.S. qualified pension modes, this total may be reduced to avoid exceeding the maximum tax deductible amount for the year.

The Additional Contribution parameter is particularly useful, when used in conjunction with the “percentage of payroll” option of the Contribution Policy parameter (discussed in a preceding paragraph), for prescribing a contribution that is a flat dollar amount: enter 0 as the Constant percentage of payroll and enter the desired contribution amount for the plan year as the value of the Additional Contribution parameter.

There are “timing” parameters that tell ProVal how to relate the plan year, the fiscal (tax) year and the date of payment of the employer contribution to the valuation date.

Except in the Canadian registered mode, there is a Fraction of year from Valuation Date to end of Plan Year parameter, used in funding calculations to add interest to the end of the plan year to values calculated as of the valuation date (asset values, liabilities, expected employer contributions, etc.). The primary calculations affected by this parameter are the interest credit to the end of the plan year and the fraction of normal cost (between 0 and 1) included to roll liabilities to the end of the plan year. If the valuation date is the first day of the plan year, enter 1; if the valuation date is the last day of the plan year, enter 0. For dates in between, compute the fraction that, when added to the valuation date entered under the Initial Asset Values topic, approximates the last day of the plan year. The date that ProVal will calculate based on the value you enter is shown to the right of the parameter’s text field.

In the U.S. qualified mode (except for a “PPA” law selection), there is a Fraction of year from Valuation Date to end of Tax Year parameter, used in calculation of the maximum tax deductible contribution limit to add interest, to the end of the fiscal (tax) year, to values calculated as of the valuation date (asset values, liabilities, expected employer contributions, etc.). The only calculation affected by this parameter is the maximum tax deductible contribution amount, which is based on liabilities rolled forward to the earlier of the end of the plan year or the end of the tax year. If the valuation date is the first day of the tax year, enter 1; if the valuation date is the last day of the tax year, enter 0. For dates in between, compute the fraction that, when added to the valuation date entered under the Initial Asset Values topic, approximates the last day of the tax year. Values entered for this parameter and the Fraction of year from Valuation Date to end of Plan Year parameter should be the same unless the tax and plan years do not coincide. The date that ProVal will calculate based on the value you enter is shown to the right of the parameter’s text field.

In all modes except U.S. qualified, you are required to specify the timing of plan year contributions under the Fraction of year from Valuation Date to average date contributions are made parameter. For the year beginning on the Valuation Date (in a forecast, the baseline valuation date) entered under the Initial Asset Values topic, ProVal assumes that the prior year contributions amount entered as the Contribution Receivable parameter value, as well as the current year employer contribution indicated by the Contribution Policy parameter and any Additional Contribution specified (as discussed in preceding paragraphs), is made on the date derived by adding this fraction to the Valuation Date. Values between 0 (contribution is made at the beginning of the year, on the valuation date) and 1.8 (contribution is made approximately nine and a half months after the end of the year) are permitted. For example, if the valuation date is the first day of the plan year and the plan sponsor pays half the current year contribution on this date and half on the last day of the plan year, then a value of 0.5 would be a reasonable entry (because the contribution is made, on average, at the middle of the year). At future valuation dates in a forecast, ProVal derives the assumed contribution payment date of the current plan year’s contributions (again, the contribution generated by the Contribution Policy parameter and any Additional Contributions specified in deterministic or stochastic assumptions) by adding this fraction to that (future) valuation date. For example, if the fraction entered is 1.5, the plan year is a calendar year and the baseline valuation date is 1/1/2009, then the current year contributions for the 2010 plan year are considered paid 1.5 years after 1/1/2010 (the valuation date for the 2010 plan year), in the middle of 2011. Note that, in this example, because the contributions for the 2009 plan year are considered paid 1.5 years after 1/1/2009, in the middle of 2010, these are receivable contributions for the 2010 plan year valuation.

Note: the value entered for the Fraction of year from Valuation Date to average date contributions are made parameter is not used to determine the timing of an end of year additional contribution made to reach a funding target at the end of the year (calculated if specified under the Forecast Analysis topic). See End of Year Additional Contribution for information about its timing.

 

Contribution Timing

The Timing of contributions parameters include the Fraction of year from Valuation Date to average date contributions are made option, (see the discussion above, in the “Relevant Conditions, Additional Constraints and Adjustments” section of this article). Note that these timing parameters have no impact on the timing of an additional contribution calculated to reach a funding target at the end of the year; see End of Year Additional Contribution for information about its timing.

US qualified mode options

For a “PPA” law selection, you can choose to Pay quarterly contributions and final contribution when due. If this option is selected, ProVal applies it for the current year and for all years of a forecast. ProVal assumes that required quarterly contributions are made 3.5, 7.5, 10.5, and 12.5 months after the beginning of the plan year and all other contributions are made 8.5 months after the end of the plan year. Thus, for example, for a calendar year plan year and a Valuation Date of 1/1/2009, if quarterly contributions are required for a plan year, ProVal assumes that:

In our example, if quarterly contributions are not required, ProVal assumes that the entire 2009 plan year contribution is paid on 9/15/2010 and the entire 2010 plan year contribution is paid on 9/15/2011.

If you select the Pay quarterly contributions and final contribution when due option, you must also check the box to reflect a Contribution Schedule (and enter a Schedule Date), although you need not enter any contribution amounts (see the discussion that begins in the next paragraph). This timing will be applied for the current year, beginning on the day after the schedule date, and for all years of a forecast. Any amounts specified as an additional contribution (see the discussion of the Additional Contribution parameter above) are presumed paid 8.5 months after the end of the plan year. For forecast years after the current year, the impact (either positive or negative) of additional contributions and/or the constraints are also presumed to be recognized at this time. 

Contribution schedule (applies to all modes)

You may check the Reflect contribution schedule box if you wish to enter the dates and amounts of actual or assumed employer contributions for the current plan year (in a forecast, for the baseline year), or for the prior plan year if such contributions were not paid by the Valuation Date and are therefore receivables as of the Valuation Date. In a forecast, it applies only to the baseline year. ProVal uses the schedule to calculate interest on known or expected contributions and will “honor” all contribution amounts entered; that is, ProVal will not reduce the total amount of schedule contributions to avoid payment of a contribution in excess of the maximum tax deductible amount for the tax year or to prevent a contribution that exceeds any applicable full funding limt.

In a forecast, a Contribution Schedule, if entered, affects payment timing only for the baseline year (year beginning on the Valuation Date entered under the Initial Asset Values topic, subject to modification by the value of the Fraction of year from Valuation Date to end of Plan Year parameter). For the succeeding forecast years, either the Fraction of year from Valuation Date to average date contributions are made parameter is used, to determine a single assumed contribution date each year, or, for a “PPA” law selection in US Qualified mode, the Pay quarterly contributions and final contribution when due parameter is used, to determine the quarterly contribution dates (if quarterlies are required) and/or a remaining payment date.

Enter the Schedule date, which should be no earlier than the date of the latest known current plan year contribution (or latest assumed current year contribution, if you enter a Schedule date in the future). When a contribution schedule is reflected, in modes where there is a statutory minimum required contribution, regardless of the selected Contribution Policy, ProVal considers the contribution policy for the baseline year (only) to be the statutory minimum option. Therefore, if the contribution amounts entered are insufficient to meet the statutory minimum requirements, ProVal assumes that there will be additional contributions for the current plan year, to reach (just) the statutory minimum amount. For modes where there is no statutory minimum required contribution, ProVal will make an additional contribution if necessary to prevent negative assets.

For Current Plan Year contributions through the Schedule date, Prior Plan Year contributions, and EROA only contributions, enter the Date and Amount of each contribution known as of the Schedule Date or assumed to be paid in the future (if the Schedule date is in the future), and indicate, in the Apply to column, whether the contribution is made for the "current plan year", the "prior plan year" or, "EROA only" if the contribution is included in the schedule only for calculating the accounting expected return on assets. All contribution dates must be after the first day of the plan year (the Valuation Date, unless modified by the value of the Fraction of Year from Valuation Date to end of Plan Year parameter); contribution amounts paid on or before the first day of the plan year should have been included in the market value of ERISA assets that you entered under the Initial Asset Values topic. Current plan year contribution dates cannot be later than the Schedule date. Prior plan year contribution dates, however, may be later than the Schedule Date. As discussed in the preceding paragraph, ProVal assumes contributions besides those entered in the schedule if they are needed to meet statutory minimum contribution requirements (or to avoid negative assets when there is no statutory minimum required contribution). 

The Include in EROA column indicates whether a contribution entered in the schedule should be included when calculating the accounting expected return on assets. For example, if expense was determined based on assumed contributions that were not realized, the contributions assumed for expense should be entered as "EROA only" contributions in the Apply to column and the actual contributions (if any) should also be included in the schedule, denoted as not to include in EROA (i.e., enter "no" in the Include in EROA column). Similarly, if the measurement year begins after the plan year and there are contributions during the measurement year that earn interest but are for the plan year after the current plan year, enter these contributions as "EROA only".  Include in EROA may also be used for accounting roll forwards that are longer than 1 year and the accounting expense should reflect contributions from the following plan year (in other words, contributions for the plan year after the plan year measured by the Valuation Set).

Notes about using a contribution schedule in US qualified mode:

Notes regarding credit balance calculations in US qualified mode

Additional Contributions 

If you have specified an Additional Contribution for the current year, or baseline year of a forecast, and you reflect a contribution schedule, then ProVal will “override” your selection of a contribution timing parameter for this year (only) and assume that the additional contribution amount is paid when the final contribution (as defined above in the discussion of the Schedule date parameter) is paid, that is:

  1. under the US qualified mode “PPA” law selection, the later of one day after the Schedule date or 8.5 months after the end of the plan year;

  2. for other law types under US qualified mode, the later of one day after the Schedule date, one day after the last contribution payment date or the first day of the next plan year. (Note: This “latest” date will be one day after the last contribution date and later than the other two dates only if the last contribution is for the prior plan year.)

  3. for modes other than US qualified mode, the later of one day after the Schedule date and the date determined using the Fraction of year from Valuation Date to average date contributions are made parameter.

     

Thus, for example, for a US qualified plan, if you reflect a contribution schedule with a Schedule date that is the end of the plan year and select the Fraction of year from Valuation Date to average date contributions are made parameter, with a value of 0.5 entered, midyear contribution timing will be used only for years after the baseline year of a forecast and will not be used in a Valuation Set. For a Valuation Set, or for the baseline year of a forecast, ProVal instead will assign a payment date after the end of the current, or baseline, year (respectively) to the Additional Contribution.

Options under US qualified mode (with a PPA law selection) for Payment method for current year Minimum Required Contribution 

Other US qualified mode only parameters​

Canadian mode only parameters

Check the box to share contribution holiday with employees if you wish to reduce employee contributions to 0 when the employer's minimum required contribution is calculated to be 0. Note that this option will affect asset projections and expense calculations. Liability calculations (e.g. refunds of contributions or offsets to gross normal cost) will not be changed based on this option.

Select the desired Contribution Frequency, to indicate whether plan contributions are made annually, quarterly or monthly. Any rounding will be done, and the normal cost may be adjusted with interest, based on this frequency. In addition, payments for amortization bases in the Valuation Set Exhibits will be displayed, if quarterly or monthly, both at this frequency and annualized.

Indicate whether Payments are made at the beginning of period or end of period. If “end of period” is selected, the amortization payments, and possibly the normal cost, will be adjusted with interest to reflect the combination of this timing frequency, the contribution frequency, and the Contribution Policy Normal Cost Methodology parameters. Note that this parameter impacts the contribution calculation but does not control the assumed timing of contributions, with respect to assumed investment return on employer contributions, during a deterministic or stochastic forecast. Assumed contribution timing during a forecast is based on the Contribution Policy Fraction of year from Valuation Date to average date contributions are made parameter.

ProVal’s standard Normal Cost Methodology is to calculate a beginning-of-year normal cost for both the minimum required and maximum tax deductible contributions. However, if you check the Apply interest adjustment for contribution frequency box, ProVal will adjust the beginning-of-year normal cost with interest to reflect employer contribution payments made quarterly or monthly (instead of a single payment at the beginning of the year), as indicated by your selection for the Contribution Frequency parameter (entered under the Minimum Funding Amortization Bases topic). This normal cost value will be used for both the minimum and maximum contribution calculations. If you apply an interest adjustment, the Use b.o.y. normal cost for minimum contribution box becomes accessible, to allow you to apply the interest adjustment only for the maximum contribution and use a beginning-of-year normal cost for the minimum contribution.

Select whether the normal cost adjustment factor for decrements is based on a constant or based on the ratio of total salary to valuation salary. If a constant is selected, enter the constant value which should be multiplied by the calculated normal cost to derive a normal cost reflecting decrements expected to occur during the year.  The constant value will be used in  all years of a forecast.  If ratio of total salary to valuation salary is selected, ProVal will adjust the normal cost each year by the ratio of total salary to valuation salary.  This ratio will be recalculated during each year of a forecast.

For the Solvency amortization rate, you may select to Blend annuity purchase & transfer value interest rates, use the Transfer value interest rate or enter a Specified rate.

If you select the option to Blend annuity purchase & transfer value interest rates, a weighted average interest rate will be developed where the corresponding liability values are used as the weights. The annuity purchase liability used to weight the interest rates will be the total of the immediate and deferred annuity purchase liabilities but only the immediate annuity purchase interest rate will be reflected in the weighted average.

If you select the Transfer value interest rate option, the transfer value interest rate basis is used as the solvency amortization rate, regardless of whether any solvency liability is calculated on the annuity purchase interest rate basis.

If you select either the Blend annuity purchase & transfer value interest rates option or the Transfer value interest rate option, all Valuations (or Core Projections) contained in a Valuation Set (or forecast) referencing this Asset & Funding Policy must base solvency liability on the same discount rate(s).

If you select the Specified rate option, the rate you enter will be used as the amortization rate and the rate(s) used to calculate solvency liability will be ignored when the amortization payment amount is calculated. This rate is used without adjustment as the solvency amortization rate in a Valuation Set and for the initial (baseline) year of a forecast. For future forecast years, a spread is calculated as the difference between the rate you entered and the solvency liability discount rate that ProVal calculated for the baseline year; this spread is then added to the forecasted solvency liability discount rates to produce the solvency amortization rate. Enter the Specified rate as a percentage (e.g., 4, not 0.04, for a 4% amortization rate).

Check the Exempt from Maximum Tax Deductible Contribution limits box to indicate that employer contributions are payable regardless of the amount of plan surplus (if any). Typically, this is applicable for an SMEP plan with negotiated contributions.

 

International Funding Rules

If you are in Universal mode, you may select to apply international funding rules and select either Brazil or Netherlands from the Country drop down box. When Brazil is selected, ProVal will allow contributions to be negative. In other words, if the funding policy contribution is calculated to be less than 0, ProVal will not place a constraint of 0 on the contribution amount.

If you select Netherlands as the applicable country, the Country Params button will be accessible and you will be required to complete those parameters.

Enter the expected end-of-year value of the Minimum required surplus amount; if the surplus falls below this amount, withdrawals are not permitted. For example enter 105 for a 105% minimum required funded ratio, computed as the ratio of actuarial assets to actuarial liability.

Enter the expected end-of-year value of the Maximum required surplus amount; if the surplus exceeds this amount, withdrawals and contribution holidays are permitted. For example enter 110 for a 110% threshold funded ratio, computed as the ratio of actuarial assets to actuarial liability.

For the Contribution strategy, you have a choice to Prepay contributions, with withdrawal subject to minimum surplus limit or to take a Contribution holiday at maximum required surplus. If you elect to prepay contributions, then contributions are assumed made according to the selected Contribution Policy, regardless of the percent limit entered as the Maximum required surplus, but prior year contributions are withdrawn to the extent that the beginning-of-year funded ratio (ratio of actuarial assets to actuarial liability) exceeds the percent entered as the Minimum required surplus.

If the Withdraw surplus over maximum required surplus box is checked, the excess percent of assets over the Maximum required surplus is withdrawn, in accordance with the Withdrawal frequency (discussed below).

If either you elect to prepay contributions or you limit the assets to the maximum required surplus and check the box to withdraw the excess, the Withdrawal frequency: every n year(s) parameter is accessible. Enter the withdrawal frequency (for example, “1” to withdraw every year, “2” to withdraw every other year) of either excess contributions, under the prepay contribution strategy, or excess surplus, under the strategy to withdraw surplus amounts that exceed the maximum.