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a. Aggregate Cost Method
The aggregate cost method calculates costs for all employees
on an aggregate basis. The aggregate cost method computes normal
costs in relation to the assets of the fund; this method does not
calculate an accrued liability independent of those assets.
In computing the normal cost under the aggregate cost method,
the value of the plan assets is subtracted from the present value
of future benefits for all participants. The remaining present
value of future benefits is then divided by the sum of the present
value of the future working lives of the active employees. The
present value of the future working life of an employee is
comparable to the present value of an annuity (computed with the
actuarial interest rate used by the plan) that pays $1 each year
until the employee is expected to retire.
b. Entry Age Normal Cost Method
The entry age normal cost method can be applied on an
individual or aggregate basis; in this case, it is applied on an
individual basis. Under the entry age normal cost method, the
actuarial present value of each employee’s projected benefit is
spread over the entire length of the employee’s service, beginning
at the date the employee began service with the employer and ending
with the anticipated normal retirement date.
The normal cost computed under the entry age normal cost
method is a dollar amount which, if paid annually and allowed to
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