; FAQ 820: Frozen Plan - Target Normal Cost > 0

FAQ 820: Frozen Plan - Target Normal Cost > 0

Problem:

I have attached a plan that has frozen benefits as of 12/31/2021. I am running a 1/1/2022 valuation. The PPA Funding Values report shows 0 accruals, which is correct, but the PV of the Target Normal Cost (TNC) is not zero. Why is it showing the PV of 0 as a non-zero number?


Solution:

A plan coded as frozen may still calculate a Target Normal Cost due to an increase in the 415 limit if the plan is funding to a lump sum.

This may happen because:

a) the system calculates increases in service, including 415 participation and service years if a participant meets the service accrual requirements coded in plan specifications

b) the system calculates an increase in the participant's 415 average compensation

The Funding Target may be limited to the maximum 415 lump sum (based on the maximum allowable accrued benefit) at the beginning of the year when the maximum 415 lump sum is less than the present value of the participant's benefit as of the beginning of the year.

The Present Value of the EOY 415 Maximum AB may have increased due to the a) and b) reasons outlined above creating a non-zero difference between the end of the year maximum and beginning of year maximum (both values as of the valuation date). This non-zero difference becomes the TNC.

The 415 maximum will be calculated reflecting the actuarial equivalence interest rate and the Statutory 5.5% rate required to be used for the calculation of the maximum 415 lump sum benefit.