CPC CPC Actuarial Concepts & Funding Methods 1 — Questions and Answers
Question 1: Which actuarial cost method spreads the present value of future benefits as a level percentage of projected future compensation?
- Entry Age Normal (Correct answer)
- Unit Credit
- Aggregate
- Frozen Initial Liability
Correct answer: Entry Age Normal
The Entry Age Normal method allocates pension costs as a level percentage of pay from the employee's entry age to expected retirement.
Question 2: What is the minimum required contribution for a single-employer defined benefit plan under IRC Section 430?
- The funding shortfall amortized over 7 years
- The greater of the target normal cost or the shortfall amortization charge (Correct answer)
- 10% of plan assets
- The unit credit normal cost only
Correct answer: The greater of the target normal cost or the shortfall amortization charge
IRC Section 430 requires contributions equal to the greater of the target normal cost (net of expected plan expenses) or the shortfall amortization charge.
Question 3: A plan's 'funding target' under PPA 2006 is measured using what interest rate?
- The plan's assumed investment return
- 24-month average segment rates based on corporate bond yields (Correct answer)
- The 30-year Treasury rate
- The Federal short-term rate plus 3%
Correct answer: 24-month average segment rates based on corporate bond yields
PPA 2006 requires use of three 24-month average segment rates derived from investment-grade corporate bond yields to discount funding liabilities.
Question 4: Which of the following best describes the 'at-risk' liability used in defined benefit funding calculations?
- Liability assuming all participants retire at the earliest possible date
- Liability using the highest possible discount rate
- Liability assuming maximum lump-sum elections and early retirement (Correct answer)
- Liability calculated without mortality assumptions
Correct answer: Liability assuming maximum lump-sum elections and early retirement
At-risk liability assumes participants will elect the most expensive optional form of payment and retire at the earliest retirement age if that increases liability.
Question 5: A plan sponsor must obtain a waiver of minimum funding requirements from the IRS when?
- The plan is overfunded by more than 10%
- Making the minimum required contribution would impose a substantial business hardship (Correct answer)
- The plan has fewer than 100 participants
- Investment losses exceed 20% in a single year
Correct answer: Making the minimum required contribution would impose a substantial business hardship
IRC Section 412(c) allows a funding waiver when a plan sponsor demonstrates that meeting the minimum contribution requirement would cause substantial business hardship.
Question 6: What is the purpose of the 'credit balance' in a defined benefit plan's funding standard account?
- To track excess contributions that can offset future minimum required contributions (Correct answer)
- To record investment gains for distribution to participants
- To reduce the plan's vested benefit obligation
- To satisfy PBGC variable-rate premium obligations
Correct answer: To track excess contributions that can offset future minimum required contributions
A funding standard account credit balance represents contributions made in excess of the minimum required amount and can be applied to reduce future minimum contributions.
CPC CPC Actuarial Concepts & Funding Methods 1
Which actuarial cost method spreads the present value of future benefits as a level percentage of projected future compensation?