Contribution Policy
Select the plan sponsor’s Contribution Policy, which specifies the basis for determining the amount of employer contributions that actually go into the plan’s investment fund each year, including future years of a forecast. To see how ProVal reflects the contribution policy to generate the total employer contribution for the plan year, select the Development of Employer Contribution exhibit under the Valuation Set Exhibits or the Deterministic Forecast Exhibits commands.
The contribution policy may or may not be related to the actuarial cost method selected. For example, if you select the “Normal Cost + Supplemental Cost” option, the actuarial cost method will be used to compute the two components of this amount. However, if you specify the entry age normal actuarial cost method but indicate that contributions will be a constant percentage of salary (e.g., 4%), then the cost method has no direct bearing on calculation of the actual contribution amount.
During a forecast, ProVal will attempt to generate employer contributions according to the contribution policy you specified. However, in the U.S. qualified and Canadian modes, if the selected contribution policy is neither the statutory minimum option nor the tax deductible maximum option, the actual employer contribution amount, nonetheless, will be constrained to fall within the range defined by the minimum required and maximum tax-deductible contribution amounts.
ProVal provides the following Contribution Policy choices:
Accounting Expense (not applicable to U.S. public, German and U.K. modes)
Accounting Service cost (not applicable to U.S. public, German and U.K. modes)
Defined by Participant in Plan Definition (not applicable to OPEB and German modes)
Multiple of expected employee contributions (not applicable to OPEB and German modes)
Funded Ratio-Dependent (OPEB mode only)
Normal Cost
Normal Cost + Supplemental Cost
Pay As You Go
PBGC Variable Premium FFL Exemption (U.S. qualified mode “Pre-PPA” law selection only)
Percentage of Payroll
Statutory Minimum (U.S. qualified and Canadian registered modes only)
Statutory Minimum + Credit Balance (U.S. qualified mode “Multiemployer” and “Pre-PPA” law selections only)
Statutory Minimum + Surplus (Canadian registered mode only)
Tax Deductible Maximum (U.S. qualified and Canadian registered modes only)
If the selected Actuarial Cost Method is one of the six methods with a frozen initial liability, depending on the mode and, in U.S. qualified mode, depending on the law selection, some employer contribution policies might not be supported. In the U.S. qualified mode, under the PPA law selection, and in all other modes except Canadian registered, only the "Normal Cost + Supplemental Cost" policy is supported, with one exception: if the selected accounting standard is GASB 25/27 (Public mode) or GASB 43/45 (OPEB mode), the other contribution policies are supported. In the Canadian registered mode and for other law selections in U.S. qualified mode, all contribution policies are supported. If "Normal Cost + Supplemental Cost" is selected, closed amortization must also be selected (open amortization is not allowed for methods with a frozen initial liability).
Note that if Reflect contribution schedule. further discussed below, is selected, the specified Contribution Policy will be honored in a forecast only after the initial valuation year. When a contribution schedule is used in the U.S. qualified or Canadian registered modes, the year 0, or baseline year, contribution policy is assumed to be the Statutory Minimum plus any specified Additional Contribution.
If the Accounting Expense option is chosen, ProVal sets the employer contribution paid for the plan year equal to the net periodic pension cost or pension cost (in OPEB mode, benefit cost) for the fiscal (tax) year ending in the plan year. Accounting expense is determined as of the end of the tax year; hence this contribution policy will produce contributions and expense that appear to be equal only if contributions are assumed to be made at the end of the tax year. To code this assumption, enter a Timing of contributions parameter (see the discussion below) indicating a contribution paid at the end of the (plan) year and enter a measurement date equal to the valuation date. Note that if your parameter entries indicate a contribution made before the end of the tax year, then ProVal will calculate, and assume paid, a contribution equal to the expense discounted by the expected rate of return on assets from the end of the tax year to the earlier contribution payment date.
If the Percentage of Payroll option is selected, clicking the Additional Parameters button accesses a dialog box in which you enter the percentage(s). If you wish to assume that the employer contributes the same percentage of payroll each year, select the Constant option and enter the desired percentage (not a decimal fraction – for example, enter 5, not 0.05, for an annual 5% of payroll contribution). To assume an annual employer contribution that varies over the forecast period (for example, 5% of payroll the baseline year of the forecast, 6% the next year and 7% thereafter), select the Variable option and complete the spreadsheet. Enter the desired percentages and the calendar years to which they apply. To code our example, if the plan year is a calendar year and the baseline Valuation Date is 1/1/2007, enter 5, 6 and 7 in the first three rows of the Payroll % column and enter 2008 and 2009 in the second and third rows of the From column. (Note: the From box in the first row cannot be completed.) The spreadsheet will look like:
| From | To | Payroll % |
| -- | 2007 | 5 |
| 2008 | 2008 | 6 |
| 2009 | -- | 7 |
ProVal fills in the To column automatically and the last percentage will be used for the last year entered and all years thereafter. Similarly, if your baseline Valuation Date is prior to 1/1/2007, the first percentage would be used for years prior to 2007. Thus, our sample payroll percentage settings will produce a 2007 employer contribution of 5% of the 2007 payroll, a 2008 employer contribution of 6% of the 2008 payroll and employer contributions in 2009 and later years that are 7% of the payroll each of those years. Our example involved only three payroll percentages: if your scenario has several payroll percentages, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet. Note that the percentage(s) apply to total salary for the plan year, not to the valuation salary (which amount will be less than the amount of total salary if there are any active participants for whom there is no normal cost). This contribution policy option, when used in conjunction with the Additional Contribution parameter (discussed below), is particularly useful for prescribing a contribution that is a flat dollar amount: that is, enter 0 as a constant percentage of payroll and enter the desired contribution amount for the plan year under the Additional Contribution parameter.
Check Include administrative expenses to add administrative expenses to the calculated percentage of payroll contribution amount. In US Qualified mode, check Include PBGC premiums (if paid out of plan assets) to also add the PBGC premiums.
In the U.S. public mode, besides the percentage of payroll, you may also check the Calculate Funding Period Amortization Assumptions box, to have ProVal compute the number of years over which the specified percentage of payroll contribution must be made in order for the current unfunded liability (i.e., as of the valuation date) to be fully amortized, assuming that the normal cost rate remains constant over the funding period. The funding period will be calculated only for immediate gain recognition (not spread gain recognition) actuarial cost methods. If this box is checked, ProVal assumes that the employer contribution each plan year is paid according to the indicated Payment frequency and Payment timing. For Payment frequency, the payments are assumed to be equally spaced throughout the year. Select Annual for one payment; Semi-annual for two; Quarterly for four; Monthly for twelve; Bi-weekly for twenty-six; or Continuous for an infinite number of payments during the year. For Payment timing, choose either the Beginning of the period or the End of the period. (Note: If more than 100 years is needed to fully amortize the unfunded liability, ProVal displays "100" for the Funding Period Output variable.)
If the Defined by Participant in Plan Definition option is selected, the preliminary contribution, prior to any Additional Contribution or minimum/maximum constraints discussed below, is the total of the Contribution Policy Data values defined in the Plan Definition and calculated in the underlying valuations or core projections. This feature might be used, for example, if the employer contribution is legally defined formulaically based on characteristics of the covered active population, such as a multiple of hours worked that varies by division. Click the Additional Parameters button to define a multiple to be applied to the Contribution Policy Data amount. If you wish to assume a single multiple for all years, select Constant and enter the desired multiple. To assume a multiple which varies over the forecast period, select Variable and enter the desired multiples and the calendar years to which they apply. Check Include administrative expenses to add administrative expenses to the calculated contribution amount. In US Qualified mode, check Include PBGC premiums (if paid out of plan assets) to also add the PBGC premiums.
The Additional Parameters button also is accessible if you select the Funded Ratio-Dependent option (OPEB mode) and it provides access to the parameters needed to determine the contribution paid each plan year. The Funded Ratio Basis indicates how to compute the Assets and Liability used in the ratio of assets to liabilities. You may choose the market value (either accounting or funding value) of assets, the market-related value or the actuarial value. You may set the liability value equal to either the actuarial liability under the actuarial cost method, the present value of future benefits, the accumulated postretirement benefit obligation or the expected postretirement benefit obligation. For each plan year, ProVal computes the funded ratio, i.e., the ratio of assets to liabilities, and compares this ratio to the specified Lower Funded Ratio and Upper Funded Ratio. If the plan’s funded ratio is less than the lower funded ratio, then the contribution paid is assumed to be the specified Flat Dollar Contribution amount plus benefit payments and expenses for the plan year. If the funded ratio is at least the lower funded ratio but less than the upper funded ratio, then the specified Flat Dollar Contribution amount is assumed paid. Lastly, if the funded ratio is equal to or exceeds the upper funded ratio, then $0 is assumed paid. Note that the lower and upper funded ratios are entered as percentages (e.g., 30% is coded as 30, not 0.3).
The Normal Cost option indicates that the employer contribution for each plan year will be the normal cost (i.e., total normal cost minus employee contribution normal cost, if any) under the selected Actuarial Cost Method, including term cost (if any) and any expenses, and PBGC premiums in U.S. qualified mode, included in funding cost. In the U.S. qualified mode, for law selections other than “PPA”, and in the Canadian registered mode, the normal cost presumed paid is the minimum funding basis normal cost.
The Normal Cost + Supplemental Cost option indicates that the employer contribution for each plan year will be the normal cost (determined as for the Normal Cost option) plus a payment to amortize the unfunded liability (determined under the selected Actuarial Cost Method). In most modes of operation, the Funding Amortization Bases topic contains the parameter settings that determine the amortization periods and payment amounts for each supplemental base that has an existing unfunded liability on the Valuation Date and for any bases created in the future. In the Canadian registered and U.S. qualified modes, however, selection of this option makes accessible the Additional Parameters button, which leads to parameters to specify the amortization basis to be used for the plan sponsor’s contribution policy. For example, in the U.S. qualified mode under the "Multiemployer" law selection, the intent may be to pay off an active benefit (plan) change amortization base over 12 years, in contrast to the ERISA minimum and maximum amortization periods of 15 and 10 years, respectively. Similarly, in the Canadian registered mode, the intent may be to pay off the amortization bases over a shorter time period than is specified under the Minimum Funding Amortization Bases topic.
In U.S. Public mode, the Additional Parameters button also is accessible if you select the Normal Cost + Supplemental Cost and it provides access to parameters for Rate-Setting Years and Interest. Check Specify contribution rate-setting years to set the contribution rate as a percent of valuation payroll in specified years. This contribution rate will be applied to valuation payroll until the next rate-setting year. Enter the most recent rate-setting Year, not later than the valuation year, and frequency thereafter to reset the contribution rate. If the Valuation Year is not a rate-setting year, enter the Initial rate set in the most recent rate-setting year. Note that new closed amortization layers are only created during rate-setting years. Also, the rate will always re-set in a year when there is a plan amendment. Specify how Interest should be applied to the normal cost plus supplemental cost. The options are Do not apply interest, Apply interest to payment timing date, or Apply interest to payment timing date, not past end of year. The two options with interest are equivalent unless the Fraction of year from Valuation Date to end of Plan Year is greater than one.
If the Pay As You Go option is selected, ProVal assumes that the employer pays contributions equal to the fund disbursements for the plan year, i.e., benefit payments plus any administrative expenses (including, in the U.S. qualified mode, any PBGC premiums) assumed to be paid from plan funds. Furthermore, ProVal assumes that the employer contribution is made at the time of the disbursements. Hence, because benefit payments are assumed made at the middle of the year, employer contributions, including any specified additional contribution (in excess of the amount needed to cover benefit payments), are assumed made at the middle of the year.
Generally, in the U.S. qualified and Canadian registered pension modes, regardless of your selection of a Contribution Policy option listed above, ProVal will constrain the total annual employer contribution to fall within the range defined by the minimum required and maximum tax deductible contribution amounts. Thus ProVal will override the Contribution Policy parameter choice and set the employer contribution equal to the minimum required or maximum tax deductible contribution amount, if necessary to comply with statutory requirements and keep the contribution fully tax deductible in the current year. Thus, in a forecast, a plan is not permitted to have an unpaid statutory minimum required contribution (MRC) from the prior plan year at any forecast valuation date.
However, there are three exceptions to constraining the current year contribution to fall within the minimum/maximum range:
For purposes of the Government Forms Extract command (U.S. qualified mode), if the Schedule Date is on or after the last day allowed to make a contribution that is reflected in the current plan year Schedule B, Schedule SB or Schedule MB (e.g., September 15th for a calendar year plan year), no final contribution will be added. Thus if current year contributions entered in the Contribution Schedule are insufficient to meet statutory minimum requirements, an accumulated funding deficiency or unpaid MRC is produced.
ProVal might not increase the plan year contribution to the statutory minimum, in the U.S. qualified mode, under a “Multiemployer” applicable law selection, if the Allow an accumulated funding deficiency box is checked (see the discussion of this parameter below). In that case ProVal will not require an employer contribution at least as large as the minimum required contribution. However, if a Contribution Schedule is reflected (see the discussion below), ProVal will add a final contribution amount to the schedule, to attain a total employer contribution for the plan year equal to the statutory minimum required contribution – with the exception noted above for the Government Forms Extract command.
ProVal may permit the plan year contribution to exceed the currently deductible maximum contribution amount (U.S. qualified and Canadian registered modes), if a Contribution Schedule is reflected. ProVal will not override the amounts indicated by the schedule as actually contributed, even if the resulting amount exceeds the maximum tax deductible amount for the current tax year.
The remaining contribution policy options apply only to the U.S. qualified or Canadian registered pension modes. The three statutory minimum options indicate that contributions in all plan years will be based on the minimum required amount according to the applicable statute. The statutory maximum option indicates that contributions in all plan years will be based on the maximum tax deductible limit according to the applicable statute.
If PBGC Variable Premium FFL Exemption is selected, then the contribution paid equals the amount necessary to qualify for the full funding limit exemption from payment of a PBGC variable rate premium. This amount is calculated as the maximum tax deductible limit computed without regard to Internal Revenue Code (IRC) section 404(a)(1)(D), which section allows deduction of an amount up to the plan’s unfunded current liability as determined under IRC section 412(l), reduced by the funding standard account credit balance as of the end of the plan year. This contribution policy is available only in the U.S. qualified mode under a “Pre-PPA” law selection.
If Pre-MAP-21 Minimum Required Contribution is selected, then the contribution paid is the Pre-MAP-21 minimum required contribution without regard to Carryover or Prefunding Balances. This contribution policy is available only in the U.S. qualified mode under a “PPA” law selection.
If PPA Target Normal Cost is selected, then the contribution paid is the minimum funding PPA Target Normal Cost. This contribution policy is available only in the U.S. qualified mode under a “PPA” law selection.
If Statutory Minimum is selected, then the contribution paid equals the minimum amount permissible by law. In the U.S. qualified mode, depending on the law selection, for single-employer plans, this may be the statutory Minimum Required Contribution as defined under PPA or the amount necessary to avoid a funding standard account deficiency under the law in effect prior to PPA; for a multiemployer plan, this is the amount necessary to avoid a funding standard account deficiency. The credit balance in the funding standard account is not preserved; thus at the end of the plan year, the funding standard account credit balance is $0. In the Canadian registered mode, the contribution paid is the minimum amount permitted by the applicable Provincial law.
If Statutory Minimum + Credit Balance is selected, then the contribution paid equals the amount necessary to avoid a deficiency in the funding standard account plus the additional amount needed to preserve the credit balance (if any) in the funding standard account. Thus at the end of the plan year, the funding standard account credit balance is equal to the beginning-of-year balance with interest. This contribution policy is available only in the U.S. qualified mode under a “Pre-PPA” or a “Multiemployer” law selection.
If Statutory Minimum + Surplus is selected, then the contribution paid equals the amount computed as the minimum required under Provincial law plus the additional amount needed to avoid depleting the surplus, if any. This contribution policy is available only in the Canadian registered pension mode.
If Tax Deductible Maximum is selected, then the contribution paid equals the maximum tax deductible amount. In the U.S. qualified mode, this would be the amount permitted as a current tax deduction under IRC section 404, with no tax “carry forward” (aka contribution carryover). In the Canadian registered mode, the contribution paid equals the maximum amount permitted as a tax deduction by Federal tax law. (Note: This option cannot be used for a CSEC plan; to model contributing the tax deductible maximum, do a separate run under the "PPA" law selection.)
In all modes, the Additional Parameters button provides access to parameters that specify details of some of the options. These details are discussed above, as relevant for each Contribution Policy parameter option.
In U.S. public and OPEB modes, to use the selected Contribution Policy to determine the preliminary contribution for a future plan year, check the Apply lag period box and click the Parameters button. Select either One year or Two years for the Lag Contribution Policy for parameter, according to how many years the preliminary contribution will be delayed. Next indicate whether this contribution is to be Based on a Percentage of payroll or a Calculated dollar amount:
Note that any adjustments to the preliminary contribution, such as the contribution constraints, No contribution if funded ratio is greater than and/or an Additional Contribution (discussed below), the full funding limit (discussed above) and an end-of-year additional contribution, are not lagged to a future year and thus are reflected in the current year.
Generally, as relevant according to the Contribution Policy parameter setting, constraints may be applied to limit the contribution. You may Apply constraints based on: 1) a percentage of total payroll, 2) a percentage of valuation payroll, or 3) a dollar amount. Constraints may apply as a minimum and/or as a maximum. Enter a percentage, not a decimal fraction, for example, 6, not 0.06, for 6% of payroll. Note that if using a dollar amount for the constraint basis, the dollar amount will be held constant during a forecast.
When calculation of an end of year additional contribution to meet a funding target has been selected, these constraints are useful for limiting (what might be) very volatile contributions, subject, of course, to any statutory constraints.
The contribution constraints are applied to the sum of only:
the employer contribution amount determined by the selected contribution policy and
the additional end of year contribution amount needed to meet a target funded ratio (if calculation of such amount has been selected).
If the No contribution if funded ratio is greater than is selected, the Parameters button will be accessible. The funded ratio amount may be a constant for all years or calendar-year dependent. The From-To-Funded Ratio% structure is similar to that described above for the Percentage of Payroll contribution policy. Define the funded ratio by choosing a liability. For funding liabilities, Market or Actuarial assets may be selected. Market or Market-Related assets may be chosen for an accounting liability.
Any amount specified by the Additional Contribution parameter (discussed below) is not subject to the contribution constraints or the No contribution if funded ratio is greater than policy and thus may be contributed regardless of these limits.
In the U.S. qualified mode, under a “Multiemployer” applicable law selection, for Contribution Policy parameter settings other than “Statutory Minimum”, “Statutory Minimum + Credit Balance” and “Tax Deductible Maximum”, the Allow an accumulated funding deficiency check box is accessible, to permit a total employer contribution for the plan year less than the statutory minimum required contribution amount. An additional contribution will be added to keep the assets no less than zero unless you check Do not make additional contributions to avoid assets becoming negative. Note that no asset return will be assumed if assets are negative. Allowing the asset value to project to a negative amount is useful if determining if the plan will become insolvent.