Average Earnings is arguably the most difficult type of item to code in DB Precision, mostly because of the large number of parameters and different combinations of parameters.

When specifying a plan's average earnings, there are several things you need to consider:

• Number of Definitions Required: if a plan has one set of rules for average earnings, then you only need to specify one Average Earnings Definition. However, if a plan has different rules (different averaging periods for example) for different groups (common for municipal plans), then you will need to set up separate definitions for each group.
• Reported Amounts: you need to be aware of all of the Reported Amounts that are to be used in the average. For most plans, there is only one earnings amount, but sometimes earnings are split into separate Reported Amounts (base earnings, overtime, and bonus for example).

  In addition, while most Reported Amounts are reported at the same frequency and period that earnings are averaged, if they are reported in a way that amounts overlap multiple averaging period, you need to specify how to allocate amounts to each period.

• Monthly Averaging: while most averaging is annual, sometimes a plan specifies averaging as using some other period such as monthly. However, such plans oftentimes still show earnings amounts on benefit output as annual amounts. If this is the case, you may still want to use annual periods for your averaging or have a separate Average Earnings Definition that is only used for display.
• Cash Balance and Career Average Plans: when a plan's benefit formula is either cash balance or career average, you generally will need to create an Average Earnings Definition that has a one-year averaging period. This makes it easier to handle partial periods, projections, and the compensation limit.
• Short Service Periods: some plans specify separate averaging rules for short-service employees. If so, there is an area on the Partial Period Rules screen to handle this.
• Dropouts: if a plan sponsor provides hours information for participants and has rules regarding excluding averaging periods when those hours are below some threshold, those rules can be specified on the Dropout/Adjustment Rules screen.

On the Average Earnings Definition screen, a description can be provided. In addition, there is a check box indicating which definition is to be used for valuation extract. When running a snapshot, DB Precision looks for the definition which has this box checked and uses the provisions as of the snapshot date to extract earnings amounts.

All amounts in the lookback period (up to 40 years) will be extracted to the extract file. If no definitions are indicated for extract, then no earnings amounts will display on the extract file.

Like all plan items, all of the rules for averaging determination reside in the provisions. The Average Earnings Provision screen and sub screens contain all of the inputs for specifying these rules.

When specifying these rules, you should be aware of the following:

• Averaging Period and Lookback Period: averaging period is the number of units being averaged while the lookback period is the number of units being looked at when choosing the highest to average. For example, a definition which is the highest 5 consecutive years of the last 10 years would have an Averaging Period of 5 and a Lookback Period of 10. When determining lookback however, some plans will specify that certain periods be skipped over if they do not meet certain criteria (see the Lookback Exclusions section of the provisions screen).
• Averaging Unit Determination: while most plans specify that periods are measured at regular pre-defined intervals (calendar year for example), some will determine periods as a function of termination date and then work backwards.
• Earnings Limits: some plans will use a specific dollar amount when limiting earnings during each period. This is rare however and most qualified plans instead limit earnings based upon the 401(a)(17) limit. As specified by regulation, these limits apply to 12-month periods based upon the limit in effect at the start of each limitation year.
• Averaging Period Determination: when an Average Earnings Definition includes partial periods, this section, found on the Partial Period Rules screen, is critical in getting your average to be correct. There are different period calculation and rounding methods that must be accurately selected in combination to get the proper result.
• Don't Be Afraid to Experiment!: when setting up a plan, do not be afraid to modify a few parameters on these screens, save the plan, and then test your calculations. You can always change the coding back to its original state.