An overfunded plan using the unit credit funding method has a credit balance. I am curious how those out there would handle establishing new bases each year. Would you:

a) establish a new base each year to force the balance equation to work, knowing that the base will only be wiped out next year because the plan hits the FFL?

b) not establish any bases because the UAL is not greater than zero?

c) do something different?

I have always considered the Equation of Balance to be sacred. By the way, the correct definition is found in Reg. 1.412©(3)-1(b)(1). Accordingly, I would establish a new base to "make it balance", even if that base will be wiped out EOY. I agree that it does not make sense to amortize the credit balance, but then that is the price we pay for having the CB concept.

I tend to ingnore the balancing equation in this case and don't create any bases. I have seen Wyatt reports where they do it PAX's way. I'm pretty sure Mercer does it the other way. Our software vendors (Wintech) do it our way (or maybe we do it there way?)

I just feel that if the UAL is negitive, then you treat it like it's zero. Therefore, if it was negitive at beginning and negitive at the end, for funding standards it's zero - zero = zero, ie: no base.

I also would not establish an amortization base.

What would be the base for anyway? It would need be a Charge base to balance the equation to zero - right?. If there are no assumption changes or plan amendment, the Charge base would have to be for Experience loss!

In outlining how to compute gain/loss, Rev. Rul. 81-213 defines the UL (UAL, if you prefer) as "excess", if any, of the AL over Assets.

So if your expected UL<=0 and your actual UAL<=0, there is no loss (or gian) - or is there?

Agreed that it is not significant, but if memory serves, you would have gotten that question on the EA exam wrong.

Yes, the EA exam always has a question that has you establish a gain/loss base on a plan with a credit balance that comes out of full funding. It's a situation where the base is not equal to the difference between the expected unfunded and the actual unfunded, but rather is a base that forces it to balance.

As for my original question, I thought I would get different answers and was just curious. Either way it's done will yield the same contribution result as far as I see. And as for the base, either the plan came out of full funding and the base is created to force it to balance or the plan remains fully funded or that base is wiped away for next year.

What would be the Base for though - Experience Loss? Just curious what the study material says on that.

Yes.

Blinky is correct. See (and read carefully) Rev. Ruling 81-213, section 7.02.

OK. Several cups of coffee later.

Doesn't 7.02 ONLY apply IF an experience loss occurs?? What if it is an experience gain and the credit balance still exists?

The following data is for the current valuation. Now, assuming an experience loss (to avoid the issue of a gain) we have

Accrued liability $500,000
Assets 520,000
CB 50,000

412 purposes
Establish a base of $30,000 such that after subtracting the CB the result is ($20,000) which is the unfunded accrued liability.

404 purposes
Establish a base of ($20,000) to maintain the equation of balance

Alternatively, IF 81-213 is followed by using an actual unfunded of 0 (because of the infamous "if any" clause) then the following happens:

412 purposes
Establish a base of $50,000 such that after subtracting the CB the result is 0 which is the unfunded accrued liability.

404 purposes
No base is necessary

Is either one "more" correct?? (other than actuaries who believe that no base should be established because the plan has a negative unfunded)

I would not choose to ignore RR 81-213. Whether you establish the 412 base of 50,000 seems to be a point of debate.

OK Blinky, before I put words in your mouth <GG>.

Can it be read into your comment that you believe that for 404 purposes there is NO base to be established (as opposed to the first option which would create a negative base equal to the unfunded)??

Correct. The unfunded accrued liability is 0 (81-213 rules!), so no base need for 404 purposes.