A new plan grants past service and assume benefits limited by 415(b). Assume Plan effective 1/1/2007 and that formula accrued benefit is $50,000 on PUC basis. So, 415(b) as 1/1/2007 is $18,000 (zero years of participation but count 1/10 of $180,000) and 415(b) as 12/31/2007 is also $18,000 (still 1/10 of $180,000). So, accrued liability is based upon a benefit of $18,000 and there is no normal cost. Charges to FSA are 30 year amortization of AL so at end of year one the Plan is potentially grossly underfunded unless employer contributes larger amount (up to 150% of CL). If Plan didn't grant past service, then PUC would be the same number as the AL and there would be a whopping minimum.

Does this make sense or is something very basic being overlooked?

I think I would question the reasonableness of your funding method. I would probably treat the accrual as normal cost, even though you could argue it is liability.

Couldn't you have a similar issue in 2008 as well? If AL you amort over 7 yrs?

Either way, I would argue the only "reasonable" method would be to treat it as normal cost - although if it is a situation where you were trying to save someone from a deficiency, I might be temped to treat it as AL, but it wouldn't be my first choice.

(Ain't my funding method !) IRS Rev. Proc. 2000-40 comes closest to defining the PUC actuarial cost method and it refers to "credited service."

Perhaps, the projected benefit should get limited by 415 before the proration rather than prorating the full benefit and then applying 415?

You need to look at your document provisions to determine which, if any, pro-ration is appropriate.

Was kind of thinking about this approach wrt the "cushion amount". Cushion amount as far as I can tell is only based on the accrual as of beginning of year for 50%, future compensation increases et al. Current accrual in plan year "is what it is" (which doesn't make a heckuva lot of sense when you look at how accruals increase in future years).

Mr. Mwyatt, you suggest a point more interesting than my hypothetical. Under traditional UC, TNC will increase with age and possibly dramatically if benefits are compensation based. Consequently, one might propose smoothing by recommending a contribution that is EAN based. I believe this strategy was affectionately known as advance funding future accruals which was one of the tenants of ERISA. In short, don't push funding too far into the future. However, the possibility looms under PPA that by contributing more than the minimum, you might be creating a credit balance you may not be able to use, or at least may not be able to use when you want to. So, PPA discourages advance funding by putting this possibility on the table. Perhaps some day Congress will offer a technical correction to this by rescinding PPA. Of course, we'll all be retired.

Mike, I think the technical corrections bill currently has a provision which pushes the current year's accrual into the 150% multiplier. Let's hope it stays there.

Amen to that!

That would be great Mike. Seemed like a bizarre oversight to me in the first place.

Indeed.