Note that, in the U.S. qualified mode, the specified actuarial cost method is used to calculate ERISA minimum required and maximum tax deductible contribution limits in valuations performed for single-employer plans for years before the funding rules of PPA take effect and for multiemployer plans for valuations performed for all years regardless of whether the PPA funding rules have taken effect. For the “PPA” applicable law type, the specified actuarial cost method is used to calculate actuarial liabilities but not target liabilities.

ProVal provides a choice of the traditional types of Actuarial Cost Method: unit credit, projected unit credit, entry age normal, aggregate, individual aggregate and the two standard types of frozen initial liability (i.e., initial accrued liability determined under either the entry age normal or the unit credit cost method) and also offers a choice of frozen initial liability methods under which the initial accrued liability is determined under the projected unit credit cost method. In the Canadian registered, U.S. public and universal pension modes, ProVal also offers three attained age cost methods, two of them aggregate methods and one an individual attained age method; under these cost methods, the accrued liability is determined based on the projected unit credit cost method and the normal cost is determined as the present value of future normal costs for all active participants spread over the present value of future salaries (or future working lifetimes). For all methods except unit credit, projected unit credit and the individual attained age method, ProVal offers both a level percent of salary and a level dollar variation. Specifically, the options are:

• <None> (applicable to universal, OPEB, German and U.K. modes and to the “PPA” law selection of U.S. qualified mode)

• Aggregate Attained Age, % of Salary (not applicable to U.S. qualified and OPEB modes)

• Aggregate Attained Age, Level $ (not applicable to U.S. qualified and OPEB modes)

• Aggregate, % of Salary

• Aggregate, Level $

• Attained Age, % of Salary (not applicable to U.S. qualified and OPEB modes)

• Entry Age Normal, % of Salary

• Entry Age Normal, Level $

• Frozen Initial Liability with Projected Unit Credit, % of Salary (FIL with projected unit credit initial accrued liability)

• Frozen Initial Liability with Projected Unit Credit, Level $ (FIL with projected unit credit initial accrued liability)

• Frozen Attained Age, % of Salary (FIL with pure unit credit initial accrued liability in the pension modes; FIL with projected unit credit initial accrued liability in OPEB mode)

• Frozen Attained Age, Level $ (FIL with pure unit credit initial accrued liability in pension modes; FIL with projected unit credit initial accrued liability in OPEB mode)

• Frozen Entry Age, % of Salary (FIL with entry age initial accrued liability)

• Frozen Entry Age, Level $ (FIL with entry age initial accrued liability)

• Individual Aggregate, % of Salary

• Individual Aggregate, Level $

• Projected Unit Credit (PUC)

• Pure Unit Credit (not applicable to OPEB mode)

Five of these cost methods are “individual” methods (aka immediate gain recognition methods) that directly calculate the normal cost and accrued liability at each valuation date as the sum of the normal cost and accrued liability, respectively, for all participants. The five methods are: unit credit (a.k.a. pure unit credit), projected unit credit, the percent of salary and level dollar variations of entry age normal, and attained age percent of salary. Normal cost and accrued liability under these methods are defined as follows:

• Typically, under the pure unit credit method, the normal cost is the present value, as of the valuation date, of benefits accruing during the plan year for which the valuation is performed; the accrued liability is the present value of benefits accrued for prior plan years (although benefits may be allocated, or attributed, differently – for details about attribution methods, see Attribution – pension modes or Active Eligibility – OPEB mode.)

• Typically, under the projected unit credit method, the normal cost is the present value of benefits attributed to the plan year for which the valuation is performed and the accrued liability is the present value of benefits attributed to prior plan years (although benefits may be allocated, or attributed, differently – for details about attribution methods, see Attribution – pension modes or Active Eligibility – OPEB mode.)

• Under the entry age normal method, the normal cost is the product of the current salary (percent of salary variation), or active participant count (level dollar variation), and the level percent of salary, or amount per active life, needed to fund projected benefits over future salaries, or over the future working lifetimes. The level percent, or per life amount, is determined at entry age. The accrued liability under this method is just the accumulated value on the valuation date of the normal costs allocated to prior years. In the pension modes, ProVal offers a variant of the entry age normal cost method, entry age normal with replacement: to use this method, select either the level percent of salary or level dollar variation of the entry age normal option and complete the Benefit Formula for EAN Normal Cost parameters of each Benefit Definition to be valued under entry age normal with replacement.

• Under the attained age % of salary method, the accrued liability is calculated under the projected unit credit method and the normal cost is the normal cost rate multiplied by the valuation salary. The normal cost rate is determined individually for each active participant, computed as the present value of future normal costs for the participant divided by the present value of the participant’s anticipated future salaries. See the Technical Reference article entitled Attained Age – Level % of Salary for details.

Ten of the cost methods are “aggregate” methods (aka spread gain recognition methods) that do not directly calculate the accrued liability at each valuation date. Instead, they calculate a frozen initial (accrued) liability (or FIL), from which the asset value is subtracted to determine the initial unfunded accrued liability (initial UAL or unfunded FIL). The initial UAL is then “brought forward” to succeeding valuation dates, i.e., increased by the prior year’s normal cost and decreased by contributions for the prior year, all with interest to the valuation date. By definition, the initial UAL and the UAL each year thereafter are zero for the aggregate and individual aggregate cost methods.

These ten ”aggregate” methods are the percent of salary and level dollar variations of: attained age normal frozen initial liability (a.k.a. frozen attained age), entry age normal frozen initial liability (a.k.a. frozen entry age), aggregate, individual aggregate, and frozen initial liability with projected unit credit. For these methods, except for the individual aggregate method, the normal cost is not the sum of each active participant’s normal cost but is determined in the aggregate. For the individual aggregate method, the normal cost is the sum of the individual “normal costs” for each active participant.

The formula used to calculate an individual normal cost under the individual aggregate method or an aggregate normal cost under the aggregate, frozen attained age and frozen entry age methods is:

Where

PVFB = Present Value of Future Benefits,

PVFEECONT = Present Value of Future Employee Contributions,

AVA = Actuarial Value of Assets,

UAL = (Frozen) Unfunded Accrued Liability brought forward,

PVFS = Present Value of Future Salaries (or of future working lifetimes if cost method is level dollar), and

ValSal = Valuation Salary (or valuation number if cost method is level dollar), i.e., current year salary (or life count) of active members under 100% retirement age on the valuation date.

For the individual aggregate method, the individual normal cost is zero for each inactive participant and is calculated for each active participant according to the formula, using for AVA the assets allocated to the participant. First, assets equal to each life’s PVFB are allocated to each inactive life; then the remaining assets are allocated to active lives, in proportion to the selected asset allocation basis. However, the final asset allocation may differ, if necessary to avoid negative normal costs. That is, if the calculated normal cost for an active record is negative (before addition of any assumed administrative expenses and/or term cost for any benefits valued under the term cost method), the normal cost is set equal to zero (and then assumed administrative expenses and/or term costs are added) and assets are reallocated. A detailed calculation of normal cost (on both the minimum and maximum contribution bases in the U.S. qualified mode) for each active participant is available in the Valuation Set Exhibits. (See the discussion of Individual Aggregate asset allocation, under the Liability Methods topic of Valuation Assumptions, for details.)

In the U.S. qualified mode, for the aggregate and individual aggregate methods, the total plan AVA is adjusted, in accordance with Internal Revenue Service (IRS) Regulations and Revenue Procedures, to determine the normal cost for the minimum required and maximum tax deductible contributions. For the individual aggregate method, the total adjusted AVA remaining after allocation to inactive participants is then allocated to each active participant (for the U.S. qualified mode, again, in accordance with IRS Regulations and Revenue Procedures) in order to determine the active participant’s normal cost. If the normal cost for an active participant is negative, it is increased to zero.

For the frozen attained age or frozen entry age methods, if a new unfunded accrued liability base is determined (for example, for a change in plan or actuarial assumptions), it is equal to the change in the pure unit credit or the entry age normal accrued liability, respectively. If the method needs to be restarted due to a negative normal cost, the UAL is set equal to the UAL recalculated under the cost method used to determine the (frozen) initial accrued liability (and any additional bases).

ProVal’s FIL with PUC option is a hybrid method; it does not calculate normal cost under the standard (“fresh start”) aforementioned formula. The normal cost under this method is determined as:

where the variables are as defined above, plus

NC_PUC = Normal Cost under the projected unit credit method, and

AL_PUC = Accrued Liability under the projected unit credit method.

For the FIL with PUC method, if a new unfunded accrued liability base is determined, it is equal to the change in the projected unit credit accrued liability. If the method needs to be restarted due to a negative normal cost, the UAL is set equal to the UAL recalculated under the projected unit credit cost method; therefore the normal cost becomes the unadjusted projected unit credit normal cost.

The two aggregate attained age methods are also hybrid methods. They have the same accrued liability as the projected unit credit method. The normal cost is defined as the normal cost rate multiplied by the valuation salary or valuation number (depending on whether the method variation is percent of salary or level dollar). However, the normal cost rate is not determined individually for each active participant; instead it is determined (in the aggregate) for the plan in total, as the sum of the present value of future normal costs for all active participants divided by the present value of future salaries, or future working lifetimes, for all active participants. The normal cost is thus:

where the variables are as defined above, plus

n = number of active plan participants under 100% retirement age on the valuation date.

When selecting an actuarial cost method in U.S. qualified mode for valuations performed for single-employer plans before the date that the funding rules of PPA take effect and for valuations performed for multiemployer plans, consider whether the selection constitutes a change in cost method requiring IRS approval. Although some of ProVal’s choices of cost method may be granted automatic approval by the IRS under certain conditions, others, such as FIL with PUC, cannot be adopted unless application is made to the IRS for approval. See IRS Revenue Procedures, Notices, Regulations and any other relevant pronouncements for guidance.

In the U.S. qualified mode, if a cost method that does not directly calculate an accrued liability is selected (i.e., one of the ten “aggregate” methods), then ProVal calculates the normal cost and accrued liability for the ERISA (actuarial liability) full funding limitation under the entry age normal cost method, in accordance with IRS Regulations and Revenue Procedures.

Except in the U.S. qualified and Canadian registered pension modes, you may check the Apply Full Funding Limit box to limit the contribution otherwise calculated under the selected actuarial cost method to the extent necessary to prevent the actuarial value of assets from exceeding the sum of the accrued liability and normal cost determined under the actuarial cost method. Thus you may prevent the generation of an employer contribution so large that it puts the plan into a “surplus” position.

In the U.S. qualified mode, you may apply a full funding limit for a plan of a tax-exempt entity. The relevant parameters are found under this (Contribution Policy) topic for a “PPA” law selection: see the discussion (below) in the “Relevant Conditions, Additional Constraints and Adjustments” section of this article. For all other law selections, the relevant parameters are found under the Bases Supporting Maximum Contribution topic.

In the universal mode, you may check the Apply international funding rules box to calculate plan cost under the rules of a specified Country (other than the U.S. and Canada). Currently, options are available to specify Brazil and the Netherlands. If you select the Netherlands, click the Country Parameters button to access parameters that further define plan cost calculations. Details of coding these parameters are provided (below) in the separate discussion of international funding rules.