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Suspension of benefits in a cash balance plan


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At the request of my employer I worked past age 65 but then was terminated without notice in December 2013, age 67.

My employer offers a cash balance plan, which is a leftover plan from previous re-organizations. In the summary, the SPD states:

"Once you have completed three years of vesting service with the Bank or its affiliates, you are "vested", which means you have earned the right to receive a benefit when you retire or leave the Bank or its affiliates. You have the flexibility to take your benefit with you as a lump-sum payment, or if the present value of your pension benefit is greater than $1,000, you can either (a) receive monthly annuity payments, or (b) leave your account in the plan until the April 1 following the year in which you reach age 70 1/2 and continue to earn interest credits."

The SPD, in a Benefits Illustration section, indicates that "Rick could receive a benefit at age 60 in a single lump sum or as an annuity. Or, if he prefers, he can let his account remain in the plan and earn annual interest credits until he is ready to retire."

The SPD also states, "If you leave the Bank after age 65, you can elect to defer payment until April 1 of the year you reach age 70 1/2".

Nowhere in the SPD document is an indication that benefits will be suspended, if you continue to work past age 65.

My employer has suspended benefits on August 16, 2011 (my 65th birthday), including interest credits. I likely received a notice at the time, but do not have the document now. My questions are, (a) can an employer suspend interest credits in a cash balance plan, (b) does the suspension end with my termination in December 2013 and am I entitled to interest credits from then onwards, and © can I recoup the lost interest credits if I wait until I am 70 1/2?

The plan states benefits in terms of a monthly single life annuity (and several other options), but does not communicate the accrued balance in the hypothetical cash balance account (contrary to the indications in the SPD).

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It appears your "suspension notice" has a conflict with your first quoted item from the SPD. Ask about it.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Based on my understanding of the law, there is no possible justification for stopping interest credits at age 65 or any other age (absent commencement of benefit payments). Even if a proper suspension notice is given on a timely basis (and the burden of proof to show that it was given is entirely on the sponsor, with no burden being placed on the participant to try to show that they did not receive a suspension notice), stopping the crediting of pay credits such as would be granted to participants who had not attained normal retirement age is a clear violation of the age discrimination laws. All non-frozen plans of every sort (cash balance, traditional defined benefit, or defined contribution) must recognize ongoing service and/or compensation after attainment of normal retirement age to the extent that they would be recognized for plan purposes with respect to participants below normal retirement age.

Even if a cash balance plan freezes all accruals, interest credits must always continue to be given. A benefit freeze would only affect subsequent pay credits.

Always check with your actuary first!

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Thinking about this some more, if the actuarial equivalency rate for delayed payment equals the interest crediting rate, not paying interest credits is the same as not providing the actuarial increase so maybe that is permitted if the SOB rules are followed. But I agree pay credits must be made.

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Thinking about this some more, if the actuarial equivalency rate for delayed payment equals the interest crediting rate, not paying interest credits is the same as not providing the actuarial increase so maybe that is permitted if the SOB rules are followed. But I agree pay credits must be made.

How does one apply actuarial increases in a cash balance plan? The accrued benefit is framed in terms of an annuity that has the same value as the current account balance. Technically, there would be an interest accrual from normal retirement age to benefit commencement age via the interest credits and the conversion to an annuity would reflect an adjustment because as the participant ages, the cost per dollar of annuity goes down. The two together could be considered an actuarial adjustment sufficient to make it unnecessary to issue suspension notices or even to make any further adjustments for deferral beyond age 70 1/2.

Not providing interest credits in a cash balance should not be considered a legitimate option, even if one issues suspension notices.

Always check with your actuary first!

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Many thanks for these clarifications. It is very helpful.

The other issue I am grappling with is the determination of the value of my benefit, particularly the method to arrive at a lump sum payment. The cash balance account consists of, (a) the opening balance, which is the conversion of an annuity of a previous defined benefit plan to a lump sum present value, (b) annual pay credits, which in my case are not relevant, and © annual interest credits (at the 1-year TCM).

As I quoted earlier from the SPD, "you have the flexibility to take the benefit with you as a lump sum payment, or...annuity, etc." In the Payment Forms section of the SPD the text reads: "Single lump-sum payment. This optional form of payment pays your full account to you in a lump sum. No additional benefit is payable."

The problem is that the sponsor never communicated the value of the cash balance account in a manner that makes sense to me. In my opinion the value of my account over time could only go up - it consists of the opening balance and annual interest credits. Instead the sponsor publishes a 'one-time payment amount', which varies widely, and above all, in 2014 was about 13% lower than in 2013. The sponsor explained that this was due to actuarial factors such as benefit commencement dates and interest rates, indicating that the 30-year treasury rate in 2013 was lower than in 2014.

At the same time, the benefit value expressed as a single life annuity benefit published by the sponsor remained constant over the last five years, exact to the penny.

In the SPD, the text under Optional Payment Forms contains the following statement: "Keep in mind, if you are married and wish to elect an optional form of payment (equal to an actuarial value that is the equivalent to your single life annuity benefit), you will need to provide your written election, along with your spouse's written notarized consent."

If I take the single life annuity benefit amount and use my IRS life expectancy (18 years) and use the Minimum Present Value Segment rates (first segment and second segment), I arrive at a substantially higher lump sum amount than the one the sponsor has told me I am entitled to, i.e. the 'one-time payment' amount mentioned above.

It is a mystery to me how a supposedly ever increasing cash balance account converts to a constant single life annuity benefit, which is then discounted at the 30yr treasury rate which varies from year to year (and month to month). And, if this method is permitted in the plan, why do the IRS present value segment rates not come into play?

Any thoughts what to do?

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How does one apply actuarial increases in a cash balance plan? The accrued benefit is framed in terms of an annuity that has the same value as the current account balance. Technically, there would be an interest accrual from normal retirement age to benefit commencement age via the interest credits and the conversion to an annuity would reflect an adjustment because as the participant ages, the cost per dollar of annuity goes down. The two together could be considered an actuarial adjustment sufficient to make it unnecessary to issue suspension notices or even to make any further adjustments for deferral beyond age 70 1/2.

From the 2014 regulations:

"...these final regulations provide that the relief of section 411(a)(13) does not override the requirement for a plan that, with respect to a participant with an annuity starting date after normal retirement age, the plan either provide an actuarial increase after normal retirement age or satisfy the requirements for suspension of benefits under section 411(a)(3)(B). Accordingly, with respect to such a participant, a plan with a cash balance or PEP formula violates the requirements of section 411(a) if the cash balance account or PEP accumulation is not increased sufficiently to satisfy the requirements of section 411(a)(2) for distributions commencing after normal retirement age, unless the plan suspends benefits in accordance with section 411(a)(3)(B)."

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Back to your questions Macuus' (sorry for the diversion), we all agree that you you have valid concerns and questions, starting with the apparent denial of interest credit. I would put them all in written, itemized, organized fashion addressed to the plan administrator. The fact that you have a converted DB benefit which has grandfather rules and may be affected by the suspension of benefits rules most likely contributes to the uncertainties.

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