Minimum Funding Amortization Bases
This topic pertains to single-employer plan funding calculations under the law as in effect prior to PPA and to multiemployer plan funding calculations both prior to and under PPA; it is relevant for all law selections except “PPA”. Under this topic, detailed information is furnished about the amortization bases in the funding standard account, as used in the determination of the statutory minimum required contribution, including the user’s choice of methodology to apply in a “fully funded” or “surplus” position. This information is then used during execution of a Valuation Set, Deterministic Forecast, or Stochastic Forecast.
For guidance, see the applicable sections of the Internal Revenue Code and related Regulations, IRS Notices, Revenue Rulings and Revenue Procedures, as well as the instructions for completing Schedule B of Form 5500 and, regarding amortization relief under the Pension Relief Act of 2010 (PRA) for multiemployer plans, IRS Notice 2010-83.
PPA changed amortization periods for multiemployer plans. Existing amortization bases will be amortized over the period indicated by your parameter settings under this topic. In the absence of published guidance for a cost method change base, ProVal will continue its present treatment (under the law in effect prior to PPA) and amortize a new cost method change base over 10 years.
The Schedule of Minimum Funding Amortization Bases Schedule date is the “as of” date for outstanding balances of the amortization bases. This date should be the same as that entered for the Valuation Date under the Initial Asset Values topic. If a different date is entered, a warning will be issued upon execution of the Valuation Set or forecast utilizing this Asset & Funding Policy and the bases will not be adjusted. Thus for example, a plan change increasing benefits in the middle of the plan year cannot be accounted for by entering the mid-year effective date as the schedule date. In that situation, separate runs, reflecting the old and new plan provisions, with a schedule date equal to the valuation date, must be done and the results prorated, or combined in some other appropriate manner, to account for the mid-year effective date. (See our Frequently Asked Questions article entitled Mid-year change in benefit level for more information.)
The Description, Remaining Period and Outstanding Balance for each existing amortization base are listed in the box below the Schedule date. (ProVal also shows the Total outstanding balance of all bases.) You can edit an entry in the list by selecting it, or, to add a new base, click the New button. The Minimum Funding Amortization Basis dialog box, containing the parameters specified for the selected amortization base or blank parameters for a new base, will appear. Enter values for a new base or edit the details for an existing base: name or Description, Date established (e.g., 1/1/2006 for a 2005 plan year loss), Initial amount of the base on the date it was established, initial Amortization period, Remaining period as of the Schedule date (including the current plan year), Outstanding balance as of the Schedule date (including the amount to be amortized during the current plan year) and annual Amortization amount, beginning of year. Asterisks denote parameters that are not required; any entries made, however, for these parameters will be displayed in the Valuation Set Exhibits. The required entries are the Remaining period and the Outstanding balance. Note that ProVal directly calculates the amortization amount. An (optional) amortization amount as of the beginning of the current plan year that differs from ProVal’s amount will be honored if the difference is within the degree of rounding you specified. For example, if you specified $1 rounding, a beginning of year amortization amount that is $1 different from ProVal’s calculated amount will be used, but a beginning of year amortization amount $2 different from ProVal’s amount will generate a warning (by way of a footnote in the Valuation Set Exhibits) that the user’s input value will be discarded. A check in the Offset OBRA ’87 DRC box indicates that the amortization amount for this base is an offset to the deficit reduction contribution for purposes of computing the OBRA ’87 additional funding charge; generally, these “offset” bases arise from the initial unfunded liability, plan amendments, waivers and switchbacks. A check in the Current Liability Full Funding Credit Base box indicates that this base was established to amortize an OBRA ’87 current liability full funding limitation credit. Check the Applicable if Aggregate funding method box to indicate that this amortization base should be retained even if the aggregate cost method is used; generally, such bases relate to waiver, switchback and shortfall bases (and, perhaps, pre-1999 current liability full funding limitation credit bases). Click OK to return to the ERISA Amortization dialog box, in which your new base, or edits to displayed details for an existing base, will appear.
Select the Methodology for creating new bases, to tell ProVal how you wish to handle minimum funding bases in a Valuation Set or a forecast when a plan is in a “fully funded” or “surplus” position (as defined under this parameter). The first of the five choices, UAL not less than 0, indicates that a negative unfunded accrued liability should be “forced” up to zero, i.e., the user’s definition of “surplus” is any negative UAL. Whether ProVal can actually force the UAL to 0 depends upon a combination of factors, including whether the cost method is of the immediate gain recognition or spread gain recognition type and whether any charge (positive) base is to be established at the valuation date because of, for example, a plan change or an actuarial assumption change. The second choice, UAL + CB not less than 0, indicates that a negative unfunded accrued liability is permitted to the extent it is offset by the funding standard account credit balance. In other words, a negative UAL may be “forced” up just to the negative of the credit balance (if other conditions, as previously noted in this paragraph, are favorable). A third choice, UAL + CB + ARA not less than 0, indicates that a negative unfunded accrued liability is permitted to the extent it is offset by the sum of the funding standard account’s credit balance and accumulated reconciliation account. In this situation, a negative UAL may be “forced” up by an even lesser amount than under the second choice, i.e., just to the negative of the sum of the credit balance and accumulated reconciliation account (again, if other conditions, previously noted, are favorable). Variants of the first and third choices also are available, annotated No new bases if UAL is less than 0. Under these variants, ProVal is directed not to set up a new base that would maintain the IRS “equation of balance” when the plan is in a surplus position. If either of these two options is selected, a warning about failure to maintain the equation of balance will be issued upon execution of the Valuation Set or forecast.
If the law selection is “Multiemployer”, there is an Elect 431(b)(8)(A) Amortization Rule check box. Check this box to reflect relief afforded by the Pension Relief Act and American Rescue Plan Act amortization rules of Internal Revenue Code section 431(b)(8)(A). If this box is checked, the Parameters button will be accessible; click the button to enter parameter values needed for these calculations. First, check the box(es) to indicate the desired Election Year(s) whose eligible net investment loss (ENIL) you wish to amortize under a PRA rule. The plan years available for election are the years beginning on the anniversary in 2008, 2009 and 2010 for the Pension Relief Act and 2019, 2020, and 2021 for the American Rescue Plan Act, of the Valuation Date entered under the Initial Asset Values topic. Once you check a box, the amortization method parameters (located below the check boxes) for the selected year(s) become accessible. Select either the Prospective Method or the Retrospective Method as the rule to use for recognizing future eligible net investment losses; the selected method will determine the portions of the ENIL recognized in the current plan year (that is, the plan year beginning on the Valuation Date) and in future plan years:
If the Prospective Method is selected, for each election Year, Enter the ENIL recognized in the current and future plan years, in the election year ENIL columns. For each column, each row represents a year of recognition of a portion of that election year’s ENIL, starting with the ENIL portion recognized in the current year (year beginning on the Valuation Date) and continuing for entry of the ENIL portions to be recognized in future years. Entries are needed for all years until there is no remaining ENIL to recognize. The current year is denoted Year 0 in the grid; the next year after the current year (begins on the first anniversary of the Valuation Date and) is denoted Year 1, and so forth. Enter the ENILs in the appropriate rows and columns, according to the intended year of recognition.
If the Retrospective Method is selected, for each election Plan Year, enter in the rows for the election years, the Total Eligible Net Investment Loss amount that was determined in the election year (this would be the total of ENILs for years prior to the Valuation Date and ENILs for the current year and all future years). For each election year, also enter the Hypothetical Market Assets value as of the Valuation Date and the Prior year’s accumulated recognized eligible loss (AREL) as determined on the prior valuation date (one year before the Valuation Date).
Calculation details, under the prospective and retrospective methods, are displayed under the Valuation Set Exhibits, Deterministic Forecast Exhibits and Stochastic Trial Exhibits commands.