Actuarial Outpost > SoA 2007 #27
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#1
04-25-2012, 03:11 PM
 frizzyguy Member SOA ASPPA Join Date: Feb 2007 Location: Minneapolis Studying for MFE College: Drake University Favorite beer: Surly Wet (I recommend moving to Minnesota to get it, it's that good.) Posts: 77
2007 #27

In this problem, I did the following correctly:

1. Solved for the employer's fraction of the UVB being 109,524.
2. Correctly reduced this by the deductible of 36,601. Employer's withdrawal liability is 72,923.
3. Calculated a payment annually of 20,350.
4. Bumbed up the withdrawal liability by one year's worth of interest to make the PV of payments 78,757.

Here is where I am confused. In the solution I have found, they use the annual payment amount of 20,350. Using this method and my trusty BAII plus I see that it takes 4.389 payments to fully amortize the liability.

I assumed because of ERISA 4219(c) that I would have to use quarterly installments. Using my BAII plus I calculate that 18.168 payments are needed. This means that a total of 92,430 are paid which would be answer E. I see that ERISA also states that different payment frequencies can be used but it doesn't shed any light on that.

Why is interest not brought to quartly dates for this calculation? Is there something I am missing in the required reading. Any help would be very much appreciated.

When I use quarterly installments, I see that it takes 18.168 payments to fully amortize the liability.
#2
04-25-2012, 03:17 PM
 Hojo Member Join Date: Jan 2006 Posts: 314

Basically, it's because the interest is compounded annually and not quarterly even though the payments are due quarterly.
#3
04-25-2012, 03:21 PM
 frizzyguy Member SOA ASPPA Join Date: Feb 2007 Location: Minneapolis Studying for MFE College: Drake University Favorite beer: Surly Wet (I recommend moving to Minnesota to get it, it's that good.) Posts: 77

In my research, I have now found that no interest be given for the one year delay in payments beginning. (Number 4 above.) Still curious about why payments are assumed to be made annually and not quarterly though.
#4
04-25-2012, 03:22 PM
 frizzyguy Member SOA ASPPA Join Date: Feb 2007 Location: Minneapolis Studying for MFE College: Drake University Favorite beer: Surly Wet (I recommend moving to Minnesota to get it, it's that good.) Posts: 77

Quote:
 Originally Posted by Hojo Basically, it's because the interest is compounded annually and not quarterly even though the payments are due quarterly.
Thanks Hojo.
#5
04-25-2012, 08:39 PM
 davefarber Member Join Date: Nov 2001 Posts: 814

Quote:
 Originally Posted by frizzyguy Still curious about why payments are assumed to be made annually and not quarterly though.
This is the method described in ERISA section 4219(c)(1)(A)(i), which says " ... the period of years necessary to amortize the amount in level annual payments determined under subparagraph (C), calculated as if the first payment were made on the first day of the plan year following the plan year in which the withdrawal occurs and as if each subsequent payment were made on the first day of each subsequent plan year."
#6
04-26-2012, 11:52 AM
 frizzyguy Member SOA ASPPA Join Date: Feb 2007 Location: Minneapolis Studying for MFE College: Drake University Favorite beer: Surly Wet (I recommend moving to Minnesota to get it, it's that good.) Posts: 77

Thanks Dave!

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