§414 + Commutation Functions

Question 1

What does the commutation function Dx stand for?

Answer 1

“PV of one payment at time x.” [v^(x)] * lx

Question 2

What does the commutation function Nx stand for?

Answer 2

“Installments of equal level payments” Sum of Dx

Question 3

How do you adjust an annual commutation function to monthly? i.e. Nx(12) =

Answer 3

= Nx - (11/24)*Dx

Question 4

What does the commutation function Mx stand for?

Answer 4

a death benefit of $1 payable at the end of the year of death, if death occurs on or after age x

Question 5

What is the commutation function Mx in terms of Nx?

Answer 5

M_x = vN_x - N_x+1 “Think of it as isolating mortality. The v factor makes Nx and Nx+1 have same interest factor”

Question 6

What is s_x:n in terms of comutation functions?

Answer 6

(N_x - N_x+n) / D_x+n

Question 7

What is a $1 life benefit payable at the end of the year if you die after x in terms of commutation functions without M_x

Answer 7

1 - d * (N_x / D_x)

d = i/(1+i)

Question 8

When would you use a commutation function with salary scale?

Answer 8

When you need an annuity with salary scale.

i.e. not for PV of liabilities but for the annuity for EAN level % of pay

Question 9

What is the formula for a commutation function with SS? (i.e. in terms of l, v, s)

Answer 9

l_xv^xs^x

Question 10

T/F The spin-off/merger rules in section 414 apply to multiemployer plans.

Answer 10

False

Question 11

T/F the spun off plans must have the same funding method as the original plan.

Answer 11

False - if De Minimis then you can choose any reasonable funding method, otherwise this is true.

Question 12

What is the general rule for asset allocation on a plan spin-off?

Answer 12

Everyone must be at least as well funded on a section 4044 (plan termination) basis.

Question 13

What is the De Minimis rule for asset allocation on plan spin off?

Answer 13

If 100% of PVAB < 3% of total assets, simply spin off assets equal to 100% of PVAB.

Question 14

If spun off plans are members of the same controlled group and the original plan had excess assets (Plan termination liab) how do the rules for asset allocation change?

Answer 14

1. Allocate assets to 100% of plan termination liability
2. Determine Weights as FT+TNC-Assets from (1).
3. Use Weights in 2 to allocate assets to plans.

Question 15

What are the 6 priority categories for PBGC?

Answer 15

1. Voluntary Contribs
2. Mandatory Contribs
3. Benefits payable 3 years ago with worst benefits in effect in past 5 years (current age is used for PV factors)
4. Guaranteed Benefits
5. Vested Benefits
6. Non-vested Benefits

Question 16

T/F Benefits for which an employee has not satisfied the eligibility condition are included in priority category 6.

Answer 16

True

QPSA, Early Ret Subsidy, Optional Forms

Question 17

What is the general rule for plan mergers’ allocation?

Answer 17

Everyone must be as well funded as before the merger.

Question 18

What is the De Minimis rule for Plan Spin-offs?

Answer 18

If 100% of PVAB < 3% of larger plan’s assets, create “PC0” allocation group for the smaller plan

Question 19

What is the special schedule for asset allocation under a plan merger? How long does it apply?

Answer 19

In order to ensure that plan participants are as well funded as before, we insert a new priority category to make sure they are as well funded.

Question 20

What’s the alternative to using the special schedule for asset allocation under a plan merger?

Answer 20

• Hold the data
• Sign something certifying that if a plan termination or merger occurs within 5 years you will create the special schedule then

Question 21

For a merger, is the special schedule based on PVAB or benefit amount?

Answer 21

benefit amount

Question 22

For a merger with a special schedule, how does it work if the plan terminates within 5 years.

Answer 22

1. Pay out benefits before special schedule
2. Pay out all benefit in special schedule
3. Pay out remaining benefits (taking out the benefits paid in the special schedule)

Question 23

T/F if a plan is merged and the resulting plan has 100%+ funding on a plan termination bases imediately after, then no special schedule is required.

Answer 23

True

Question 24

T/F if the sum of the assets is greater than the present value of the accrued benefits, it is not necessary to create a schedule of benefits under 414(l).

Answer 24

True