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Old 11-02-2019, 06:48 PM
bgoddu bgoddu is offline
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Default EA-2F - ASM Question #130

Question #130 asks for the deductible limit for 2008--

The first two steps of the solution are to calculate the IRC 431 minimum for 2008 and compare to the IRC 404 maximum for 2008. Both of these calculations require that you include the initial unfunded liability-- I'm just a little unclear on why it's being done the way it is and any help would be appreciated.

The problem notes that the "initial unfunded liability" is $104,581. I take this to mean on the Plan's effective date of 1/1/2001. Thus, when calculating the IRC 431 minimum you need to include the 30-year amortization of this unfunded amount (i.e. $104,581 divided by a 30-year certain annuity at the Plan's interest rate of 7%). This makes perfect sense to me.

However, in the calculation of the IRC 404 maximum we need to include the 10-year amortization of the unfunded amount. I would think that this means we take the remaining balance as a of 2008 and amortize that over 10 year (i.e. the part remaining after the payments from 2001 to 2007), but the solution uses the initial $104,581 and amortizes over ten years. Why would we return to using the initial unfunded in this calculation? It is unclear to me why we would amortize the 2001 balance as of 2008. Is there something about the funding method that I'm not understanding for Attained Age Normal?

Thank you to anyone who gives this any thought.
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Old 11-02-2019, 10:45 PM
davefarber davefarber is offline
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Default

So just to be clear for anyone with the current 2019 edition, this is question 132.

The amount that gets amortized over 10 years for deduction purposes is the original amount of the base (you don't determine how much is unfunded and re-amortize it over 10 years). That is why the original $104,581 from 2001 is being amortized over 10 years, not the amount unfunded as of 1/1/2008. The method is attained age normal, and only has that initial base. Had there been other bases, then each of the other bases would also be amortized over 10 years. So, for example, say the method was unit credit, and you were told that there were no gains or losses in any year other than a loss of $20,000 in 2006. Then in addition to amortizing the initial base of $104,581 over 10 years, you would also amortize the $20,000 loss base over 10 years, and add that result to your deductible limit (maximum).

Technically, each base has a limit adjustment, which is the smaller of the 10 year amortization of the base or the unamortized balance of the base. So in the actual question, the 10 year amortization of the initial base is $13,916. You can figure out what is still unfunded using the balance equation (outstanding balance less credit balance equals unfunded balance). The outstanding balance (using the 30-year amortization, with 23 years being left as of 1/1/2008) is $95,000, so the unfunded balance/unamortized balance is $75,000 after reducing this by the $20,000 credit balance.he 10-year amortization is far smaller.
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Old 11-03-2019, 12:06 AM
bgoddu bgoddu is offline
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Default Thank you!

Ok, thank you for clarifying. So I guess the limit adjustment is really based off the amortization amount for outstanding bases had they been amortized over 10 years, rather than their actual amortization periods.

I was under the (wrong) impression that it was the 10-year amortization of the outstanding balances and I think the fact that it was an initial unfunded base made it a little more confusing for me, but your example was very helpful.

Thank you!
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