Mike Preston

We recently had a discussion about when it is logical to suggest a cash balance plan instead of a traditional DB for a 1 person plan. I presented two, off the top of my head, reasons why I thought it not in the client's best interests to go the cash balance route: the fact that cash balance plans have been individually designed plans (and hence both more expensive to maintain and providing less protection, on audit, than a volume submitter plan) and the fact that in the event of death the strong recommendation of document providers is to either submit a 5310 or (eventually) amend and restate under a volume submitter plan. In any event, both of my objections will soon evaporate when CB Volume Submitter plans become available. But I got to thinking and there are other reasons. One of the arguments put forward in favor of the CB plan is that the client understands the CB plan better because, in general, the contribution equals or is close to the defined CB allocation. In technical terms, each year's contribution consists largely of target normal cost and there is precious little based on the funding target. But that pattern is notoriously unforgiving. In fact, a traditional formula allows the consultant to design a funding pattern for the first few years of a plan that is based on the cushion under 404. This subsequently allows for tremendous flexibility in funding in later years, which means no worries of minimum funding violations, while at the same time allowing for substantial maximum deductible contributions. Can this pattern come to be in a CB plan? Of course it can (although it is much more difficult to do so if the client has been told that focusing on the current year's formula means something). But it obliterates the argument that the CB plan is more understandable because the annual contribution is closely related to the target normal cost. As Larry so accurately pointed out, while a client might understand some of the concepts that impact a plan, unless the client is a pension professional, it falls on us to actually understand those concepts and to implement them in a way that allows the client to meet their goals, both short term and long term. Another concept might help to explain my attraction to the traditional plan: the CB plan essentially overlays the CB requirements over the traditional plan's ruleset. Stated another way, all the rules of the traditional plan (with the exception of 417(e) and a faster vesting schedule that has no impact on one person plans) remain in effect when the plan is a CB plan (415 limits, minimum funding, 404 funding, restrictions on distributions if the plan is not adequately funded, accrual rules under 411, etc.). On the other hand, none of the CB rules are in effect when the plan is a traditional DB plan. So, why would you want to worry about 2 sets of rules when you don't have to? Here is an example. When CB plans were in their infancy, the IRS allowed interest crediting rates that were eventually determined impermissible. The IRS gave us leeway on how to transition from what ended up being described as impermissible rates to the newly defined permissible rates. Why subject a plan sponsor to that kind of issue if you don't have to? Think it can't happen again? Yes, it can. Of course, that same thing can happen to any plan design, but it is much less likely to come up with a traditional design than a cash balance design. Again: the plan is subject to two rulesets (traditional AND CB) when it just doesn't need to be. And yet, there is more. A cash balance plan has to do additional work to convert hypothetical account balances to J&S annuity values when preparing relative value disclosures. Those J&S annuity values, when based on traditional formulas, either automatically pop out (if they are expressed in the normal form) or are dead simple to convert. I'm pretty sure that this missive won't change anybody's opinion about the type of plan that's best for a one person plan. But for me it is simple. If a traditional plan can be designed to meet the needs of a client then suggesting a CB plan unnecessarily subjects the client to rules that they wouldn't normally have to worry about and, at some level, exposes them to additional costs. Only if there are offsetting advantages would it make sense to advocate for a CB plan.

Nope. What I was talking about is 180 degrees in the opposite direction of where you want to go.

Sorry, selling the client a fancy new bauble that turns out to be something other than a genuine gemstone is frowned upon by most. Claiming that clients understand CB plans better than they do traditional DB plans is just plain wrong. Among many other things, clients will never understand that the super integrated formula referenced earlier generates a hypothetical account balance well in excess of the 415 limit. And it will almost always be simpler to get where you want to go in a traditional DB plan other than plans which are designed to provide benefits less than the 415 limits and otherwise act as super DC plans. Most of my one man plans are interested in two things: funding flexibility to the extent possible and accruing maximum benefits in good years. A traditional DB plan makes it easy to provide both, and up until the VS document providers actually publish a pre-approved plan, don't expose clients to a death tax of sorts for the strongly recommended A&R. If you don't understand what I'm talking about I've made my point. If you do understand my point and hold to your position why are you exposing your clients like that?

Tom, the way I read the OP he was talking about somebody who worked less than 1000 hours so there would not have been a DB accrual.

The gateway is zero.

When you give up trying to satisfy the IRS on this issue, consider negotiating a change to NRD 62 with subsidized early retirement at what ever age you want. PPA funding can then be based on the actuary's best estimate and the deductions will not change. Good luck.

We didn't address the post-65 issue. Somebody said it wasn't a big deal. It is. To say it isn't is to say that 415 isn't a big deal. I don't consider it being conservative. I consider it doing what is best for the client, not only for the client that walks through the door, but also those that might be impacted (heirs, future employees, future partners, etc.). You haven't addressed what you say to the heirs. The absolute best thing about CB plans is exemption from 417e. Tell me how that matters to the 1 person plan? Be honest. If the absolute best thing associated with CB plans doesn't amount to a hill of beans, can you start to see the issue?

So you want to explain to the heirs that an unnecessary A&R is required because you recommended a CB plan when a traditional plan was available? And who wants to explain "Well, you are now older than 65 so our plan design has reduced your 415 limit unnecessarily." And not to be picky, but have you heard about the obsolescence of 8905? There are just so many things wrong with a one person plan being set up as a cash balance there isn't the time to delineate them all. Peace to all, one way or the other.

There is just so much to disagree with I hardly know where to start. How long have you been doing this to your one person clients? Up until right about now (actually in about 2 months) all cash balance plans have been individually designed. Why in the world would you put a client on an individually designed plan when that isn't necessary? You mention flat interest rates, but you don't specify 5%. This is a common error. Use of anything other than 5% results in reductions to Section 415 lump sums. Why would a one person plan opt for a design that reduces the maximum deductible? As far as the 65000 you mention, I don't have time to check that at the moment, but since DC annual additions are use them or lose them most clients will shy away from any DB plan in their 30's unless they can establish with reasonable certainty that they are in the last 10 years of income generation (sport's figure, for example). Otherwise they are trading $100,000 to $200,000 deduction years for $80,000 deduction years. Yuck.

Is there an effective difference?

And, if personally audited, the participant has to explain compliance with 72. In the absence of success, the participant has taxes to pay. Big time.

No, I don't get your point because there is nothing at all that has ever even hinted at that. I know it is fashionable these days to make stuff up, but I try to avoid it. YW..

'Ya think?

You are thinking too hard. A forfeiture is not a distribution. Period. Full stop. A forfeiture is a specific event on a specific date that takes place or does not take place.

What part of the word "distribution" do you think incorporates "forfeiture"?

I think you are stuck with both.

You should look to your actuary for guidance.

You don't need the letter of explanation. Just DFVCP cures both DOL (actually EBSA) and IRS issues.

Collective.

Yes, unless plan documentation requires a different result.

100% correct!

We just received a census from a client that showed a suspicious number of people with 168 hours. Turns out they were on-call for one week (and only one week during the entire year).

No.

I think I agree with card. Seems most consistent with -3 of the regs.

For a beneficiary????