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Separate Interest Annuity in Cash Balance Plan

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If a company changes from the ERISA qualified defined benefit plan to a cash balance plan, the Participant and the Alternate Payee have the option of taking an annuitized payout as a shared interest allocation, if, as and when, using a coverture fraction based formula, or as a lump sum from the cash balance component.  See

But the question I have is whether there is an option under a cash balance plan for the Alternate Payee to take separate interest allocation?  The attached article seems to say "yes".    

What do you think?  




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Well, first, a cash balance plan is typically an "ERISA qualified defined benefit", so that isn't an issue.

Secondly, a cash balance plan still has an underlying annuity value.  It might not be expressed that way on benefit statements and illustrations, but the cash balance benefit has an underlying annuity value.

When you say, does the AP have a right to take a "separate interest allocation" do you mean can I split the CB benefit like it is a DC plan and assign a portion to each person, or do you mean can I use a standard "separate interest QDRO" where the APs benefit is independent of the participant?  

I don't see any problem with either, as long as there is an actuarial adjustment for age differences.  That said, depending upon the CB formula, the AP should determine if they are better off taking a % of the current cash balance, or if the more traditional "ultimate benefit times coverture fraction" would be better.  Since the actual rate of accrual, expressed as an annuity, typically declines with age under most cash balance plans, the AP might be better just taking a piece of the current benefit. 

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Thanks for your reply.  From an actuarial point of view the cash balance part of a CB plan is normally much less than the computed present value of the stream of future payments in a traditional annuitized payout of a defined benefit plan.  The problem of course is that the present value computation makes dubious assumptions with respect to COLA rates, the applicable discount rate projected far into the future,  the age of the Participant's retirement, and the life expectancy of the Participant, and assumes sub silentio, that the Alternate Payee's will live at least until the death of the Participant in order to receive his/her share of the Participant's retirement annuity benefit during the Participant's life expectancy.

So for the Alternate Payee the choice is to take a share of the cash balance that may prove to be less (if the Participant exceeds his life expectancy ) or more (if the Participant dies before his projected life expectancy or if the pension plan fails and falls under the trusteeship of PBGC), or take a chance that the Employer will survive and thrive and that the  Participant will live a long and healthy life and move up to become a senior executive with a far greater pension annuity than expected . 

By separate interest I am talking about taking 50% of the marital portion of the Participant's defined benefit (not the cash balance value) accrued during the marriage and assigning it to the Alternate Payee as his/her sole and separate property interest, with all of the requirements including adjustment of the amount paid per the life expectancy of the Alternate Payee (rather then the life expectancy of the Participant) , compliance with the age 50 rule, inclusion of early retirement subsidies - or not, etc. 

I guess another related question might be whether or not a separate interest awarded to the Alternate Payee carries with it the right of the Alternate Payee to take the cash balance of his/her separate interest rather than an annuitized payout?  

In all events my research confirms the options for shared and separate interest allocations, but nothing is said that about interplay, if any, with a cash balance plan.  Maybe I am just overthinking the matter.   

Attached find a Memo prepared with respect to the decision to go with a shared v. a separate interest annuity, or to ask for a lump sum payment, and the Gillmore approach and the financial and practical considerations and consequences.


Shared v. Separate v. Lump Sum v. Gilmore, and more.pdf

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