CPC CPC Actuarial Concepts & Funding Methods 2 — Questions and Answers
Question 1: Under the Unit Credit actuarial cost method, how is the normal cost determined?
- As a level dollar amount over the participant's career
- As the present value of the benefit earned during the current year (Correct answer)
- As a level percentage of projected pay
- As a flat percentage of plan assets
Correct answer: As the present value of the benefit earned during the current year
The Unit Credit method defines the normal cost as the present value of the benefit unit earned by each participant during the current plan year.
Question 2: A plan's adjusted funding target attainment percentage (AFTAP) falls below 60%. What benefit restriction is triggered?
- No benefit payments can be made
- Lump-sum payments and accelerated benefit forms are restricted
- All benefit accruals must cease immediately (Correct answer)
- The plan must be terminated within 30 days
Correct answer: All benefit accruals must cease immediately
When AFTAP falls below 60%, the plan must cease all future benefit accruals until the percentage is restored above the threshold.
Question 3: Which segment rate is used to discount liabilities for benefit payments expected more than 20 years from the valuation date?
- First segment rate
- Second segment rate
- Third segment rate (Correct answer)
- Blended average of all three segment rates
Correct answer: Third segment rate
The third segment rate, reflecting longer-maturity corporate bond yields, applies to benefit payments due more than 20 years after the valuation date.
Question 4: What is the maximum period over which a funding shortfall amortization charge can be spread under IRC Section 430?
- 5 years
- 7 years (Correct answer)
- 10 years
- 15 years
Correct answer: 7 years
Under IRC Section 430, shortfall amortization bases are amortized over 7 years from the year they are established.
Question 5: A consulting actuary uses the Aggregate funding method. Which statement is true?
- A separate unfunded past service liability exists and is amortized
- The method produces no separate past service liability; gains and losses are recognized immediately (Correct answer)
- The method is prohibited for ERISA-covered plans
- Normal cost is set equal to 10% of plan assets annually
Correct answer: The method produces no separate past service liability; gains and losses are recognized immediately
The Aggregate method spreads all costs (including past service) over future working lifetimes as a level amount or percentage, producing no separate past service liability.
Question 6: When a defined benefit plan has an AFTAP between 60% and 80%, what restriction applies?
- All lump-sum payments are prohibited
- Only 50% of lump-sum payments otherwise available are permitted (Correct answer)
- Benefit accruals are limited to non-highly compensated employees
- No new participants may enter the plan
Correct answer: Only 50% of lump-sum payments otherwise available are permitted
When AFTAP is at least 60% but below 80%, the plan may only pay 50% of the present value of any lump-sum or other prohibited payment otherwise available.
CPC CPC Actuarial Concepts & Funding Methods 2
Under the Unit Credit actuarial cost method, how is the normal cost determined?