A client made the last contribution last year for a participant who reached retirement in 2003.

Now, the 1/1/2004 valuation is being performed and this participant is still active.

Some obvious funding choices would be (method is Individual Aggregate)

1 Treat like a retiree and set assets to PVB and no further funding

2 Treat as active and assume 1 more year of funding giving appropriate formula increase and/or actuarial equivalent increase

Another option being proposed is to calculate the lump sum as of the valuation date and subtract the allocated assets and fund the difference in the current year.

The first 2 options I feel comfortable with but feel queasy about the additional option. Any ideas??

The third method sounds like a 'pay as you go' funding method, which was outlawed with ERISA. I prefer no. 2 as there may be a benefit increase from formula which is larger than the AE increase.

I like 1 if the participant has not accrued any more benefit and 2 if he has.

If the participant is eligible for and elects to commence payment (even if still active), then that would probably solve your problem, so choice 1 would make sense.

Choice 2 may require a change in assumptions. Is that reasonable? perhaps even necessary?

First I would want to know if there are other participants--because if there are other participants the assets would have to be allocated. Since you're using Ind Agg, the assets are allocated based on AL + NC. If a participant's PVFB is greater than his asset allocation, there may well be future funding until these benefits are paid out in total. If the assets allocated to this participant are less than the PVFB, then the difference is that participant's NC--whether this participant is still working or not.

You don't say if there are other participants or not.

If not, then I don't think using the IA funding method is reasonable for any option. Option 1 means you have no working lifetime. How would you determine a contribution, other than to say the NC is zero each year? Flogger, you say that the difference would be the NC, but how do you arrive at that without a working lifetime to spread the costs over? Option 2 means you are continually funding the unfunded amount each year, which is not allowable. Option 3 with 1 person is really the same as option 1, except you are assuming a lump sum.

Now if there are other participants, I think any of the 3 options are reasonable to use. When you presume someone past retirement age will retire is simply a valuation assumption.

Blinky, I stand corrected on using IA if the Participant is not working. But if he continues to be an active, can we not use IA on the assumption of pushing retirement out 1 year every year?

My understanding is that this is not reasonable for the reasons stated by rcline, in that it is a pay-as-you go method that is constantly funding the unfunded assets.

My understanding of the old "pay as you go" funding method is that the sponsor puts money in as benefits are paid. I never understood "pay as you go" to mean to funding the difference between assets and liabilities. "Pay as you go" in pre ERISA days was a technique used to minimize contributions, not maximize.

I see no difference in funding the delta between PVFB and allocated assets for a 64 yr old retiring at 65 and funding the delta for a 71 yr old assumed to retire at 72. In the case of the 64 yr old, IA is permitted. Why not for the 71 yr old?

By pay-as-you-go, I was referring to funding the unfunded amount each year. My mistake for wrong terminology. I see now rcline meant something entirely different.

But I think the difference in the 64 year-old versus the 71 year-old you reference is that the 64 year-old's period is 1 year for the first time, not each year again and again. From a funding method standpoint (disregard the plan permanency issue), do you think it would be permissible to set up a new plan and assume the retirement age was the end of the plan year?

Mathematically, it doesn't seem to be much of a funding method to have to fund the unfunded each year. The pre-retirement interest assumption would be inconsequential for an end-of-the-year valuation and nearly insignificant for a beginning-of-the-year valuation.

I believe the IRS has commented on this before, but I can't recall when or where.

It is merely a matter of assumptions. If, at the beginning of each year, I believe that the most reasonable assumption is that this individual will retire at the end of the year in question, all else cascades from that assumption. The fact that the assumption turns out to be wrong doesn't bother me at all, as long as when it was made (and re-made and re-made) it was my best estimate.

Under that criteria then after a few years of continually assuming retirement at the end of the year you would have to say to yourself that your best estimate ability is in question. Also, for an end-of-the-year valuation, being that you are performing the valuation after the end of the year, you would already be wrong in assuming retirement at the end of the year.

Completely and dogmatically disagree. The act of selecting the assumption is a discrete act. It takes place once each year. The fact that it turns out to be less than 100% accurate (even repeatedly) doesn't change the fact that on the day that a best estimate was prepared, it was, in fact, a best estimate.

I don't disagree if this was the criteria of the assumption at the time. My point is that in my opinion this criteria is not met with a blanket assumption of the person retiring every year at the end of the year.

OK. Sorry but I have been gone.

Yes, there are other participants.

I believe that there is "some??" acceptance for the "assumption" of one more year of funding (at least on a beginning of the year valuation).

However, it also appears that taking the difference between PVFB (monthly benefit times APR in this case) and the allocated assets constitutes pay-as-you-go funding in some minds.

Mike (Preston)
The assumption being a best estimate - does it matter (it would appear not to) that every 1/1 that the unfunded (allocating this participant their share of the assets) becomes the normal cost.

Thanks to all for your comments to date.

It does not matter. It is the direct result of applying the best estimate. To do otherwise (when the best estimate is that the retirement date will effectively be that funding takes place over the one year period beginning on the valuation date) would be a problem.