figure 8

Eh, I don't know. I've come across owners with no employees who can grasp the basic concept of the CB and have a general understanding of how it works (including one man plans). They obviously don't have the actuarial knowledge of the behind the scenes rules and details, but they can see something like " hey my CB allocation is X each year; that matches what I contribute." The design clearly lines up with the expectation, whereas almost no owner is going to have a clue what a $1750 accrued benefit means in terms of an annual contribution. Let's face - it doesn't really matter that much though, because for an owner-only plan, you're basically right - they generally just care about the money being all theirs and that they can contribute what they want to contribute. Which is why I still stand by doing CB plans for one-person plans. It doesn't really matter to the typical owner-only client what plan you do if there's no practical extra cost or risk to them, and so I'm going to do what I feel is simpler and what I'm more comfortable doing - CB. I just feel like CB plans are superior, and that opinion doesn't change based on participant count size. I do agree with you on our most important job though (keeping them within boundaries, knowing the rules, etc). Really the only reason I've been arguing in this thread is because I feel like I'm being told I'm doing something wrong. I take a lot of pride in my work and do what I feel is the right thing. I try to do a good job (and feel like I do), so I'm not going to take too kindly to that criticism. Whatever happened to just agreeing to disagree?

I understand perfectly. I shall now get off your lawn.

I'm guessing that the longer one has been in this industry, the more likely they are to stick with trad'l DB in certain situations. Which is perfectly fine if that's what you want to do. My only issue at this point is being accused of doing things wrong. I will defend that. Otherwise, it seems like it mainly just comes down to opinion and personal comfort level.

Swoosh and I both mentioned that a rate below 5% will negatively impact someone's 415 limit past 65. So use 5% if that's going to potentially come up. No one's disagreeing with that. I would say to the heirs that same thing I would say to the heirs of a trad'l DB plan. I don't understand what you're saying about an unnecessary A&R. To me, that's something that someone with an extremely conservative outlook would say. Have you ever heard of this happening? I disagree the best thing about CB plans is the "exemption from 417e." That's one thing. Also, they're just easier to appropriately design and they're simpler for the client to understand. I have been honest, and I do not see the issue.

No offense Mike - but again, you're coming across as someone who takes an extremely conservative approach to this. And we addressed the post-65 issue. I feel strongly that a trad'l DB plan is inferior to a CB plan in almost every situation I come across (including a one person plan). I understand that you disagree. It'd be nice if you could disagree without implying I (as well as the other actuaries who do this) do things wrong. Peace.

For quite a few years now (ever since the IRS made it clear that they intended to eventually get around to pre-approved cash balance documents) it's been perfectly acceptable to draw up a cash balance document (using FT William or Datair whatever other standard document vendor you might want to use) and have the client fill out a Form 8905 (intent to adopt pre-approved document once the IRS make them available). This requires no determination letter. This requires no extra fee than a trad'l DB document would cost (not from me at least). The only extra thing you have to put the client through is an extra signature (signing the Form 8905). Is an extra signature really that bad of a thing to put a client through? Regarding the timing of starting up a DB plan - I'm not saying everyone should start maxing out in their 30s. I'm saying - if that's what someone wants to do for whatever reason they have - what's wrong with setting up a plan? Yes, you can't deduct as much in your 30s as you can in your 60s, but at least you get 30 years of tax deferred investments. There could be all sorts of reasons for starting a plan in your 30s. Maybe someone intends to be on their own for the next 10-15 years before going to work / becoming a partner at a different firm - at which point, they could end up taking advantage of a second DB plan. To simply say - nah, you're in your 30s, you don't want to do this - doesn't seem helpful. It seems better to get a fuller story and make sure the client understands the implications for the present and future, and let them make their own decision. Also, I don't agree on your 5% comment, and I'm going to gander that most actuaries who work heavily with cash balance plans would disagree as well. At least, that would be my guess judging from all of the webinars I've seen, takeovers I've seen, and just generally talking to other actuaries at different firms (as well as my own understanding of the 415 calcs). However, I do believe that after age 65, a rate smaller than 5% would create a lower 415 limit. But that's not what we're talking about here. Mike, you sound like someone who takes an extremely conservative approach to this. Which is perfectly fine if that's what you want to do. But please understand that not everyone in the industry is like that, and I have full confidence with my approach here.

I respectively disagree with a couple of those comments. 1. I prefer setting up cash balance plans vs trad'l DB plans for one-person plans. Cash balance plans are so much easier than trad'l DB plans, in my opinion. You can keep things simpler and more predictable with a CB plan with a flat interest rate than by setting up a trad'l DB plan. There are very few situations where I'd opt for a traditional DB over CB. Personally, I would charge the same thing for either plan, but I have a bit of a dislike for the trad'l DB. 2. The 415 DB contribution limit for a 32 yo comes out to be around $65k or so . If you're looking to put away as much as possible for a) future retirement savings, and b) immediate tax deductions, then why not set up an additional plan? I'm particularly curious what the "additional complications" of a CB plan are.

I don't believe so. I think they just said the IRS has informally said this is okay, and that there are many determination letters out there to prove it. As someone who has been getting into floor offsets, I can say it was a very helpful webcast. If you can't find it, I can share a copy of the pdf if you want.

If the plan has been hard frozen since the 1990s, that would be the reason for the 0 normal cost each year. If the plan is 100% funded, I see no reason why they couldn't do a standard PBGC termination. Was there something in particular concerning you about this case? Being frozen for 20+ years would be odd if this is a small well-funded plan (and think of the years of wasted premiums and actuarial fees that could have easily been avoided with a termination), but the length of time frozen shouldn't have any impact on termination.

Note that the percentage limits aren't as simple as they may seem for 1099 income. You have two options when you have a PS and CB plan - keep your PS allocations to 6% of income and contribute whatever the CB plan allows, or keep your PS+CB allocations to 31% of income (well, and you still have the 25% limit for PS). You just have to be within one of these limits each year on your taxes. However, note that your 1099 income gets reduced by your retirement plan allocations for this purpose. So there are circular calculations going on, because as you contribute more, your compensation used for the limits goes down. I'm sure there are probably plenty of companies who will run numbers for you and give you some advice. Companies that offer retirement plan services and actuarial services would be the places to look.

There was an ACOPA webcast on floor offsets a little over a year ago. In that webcast, they used an example very similar to your case. Their conclusion was that even though there is no written guidance, the IRS has informally said this passes the reasonable and uniform test, and there are many of these plans with determination letters.

You shouldn't be too worried about the PFB. All it basically represents are the contribution amounts that were in excess of the minimum required contribution, carried forward with interest each year. So most likely the plan sponsor a) contributed an amount to the plan that was well in excess of what was required, b) experienced a tremendous return on assets for the year, or c) a combo of a) and b) (and probably the most likely option).

Thanks for the follow-up. I was thinking about plan termination as well. It might make sense to shut this one down and start a new plan with a different design. I'm not sure how well this design has been working for them. I was also thinking about messing with assumptions, as you mention - something like assuming people quit/retire at age 55. I'm just not sure I can feel good about that being reasonable given that several people, including some doctors, are past that age. But a $15k premium for this group is not reasonable either. Maybe I can come up with some assumptions I feel good about. I've been trying to see if I can justify using at-risk assumptions, since that makes the funding target pretty close to the actual CB benefits (again, plan is 99% funded on actual CB benefit basis). It doesn't appear that such approach would be acceptable unless the plan was actually at-risk though. I'll need to think about this one a bit more.

The PBGC instructions say this: "Note for small plans with year-end valuation dates – It is not practical for a small plan with a year-end valuation date to opt out of the Lookback Rule." I always figured that when it says it's not practical for a small plan to opt out of the lookback rule, that it means it's basically not an option. Have you opted out with an end of year val before? The filing an estimated filing now and amending after year end is intriguing...

Sorry - to clarify: I (TPA/actuary) took over this plan in late 2017. I filed the initial 2017 filing (late), and it was a fairly small premium for the reasons you mentioned. I am looking at the 2018 filing now ($15k). Also, note that the lookback rule must be used because it's an end of year val.

Client (small medical company) has had a CB plan for several years and just became large enough to trigger coverage in the middle of 2017. 2018 is first full year of coverage. The plan has more than 25 employees at 1-1-18, so the small plan cap is not usable. The plan has a few doctors with large benefits who are 10-15 years from retirement. CB rate is 5%, but PBGC rate for them is about 4%, leading to inflated PBGC funding targets (i.e., PBGC FT is significantly higher than the actual CB benefits). The alternative rate is even lower, so that doesn't help. Plan is end of year val, so assets are as of 12-31-17. Can't do anything to make that asset value higher, though a large contribution could be made for the 2017 plan year to increase 12-31-18 assets and decrease next year's premium. This seems like a perfect storm, as the premium is coming out to be over $15,000! And this is for a group with about 30 participants that is 99% funded on a lump sum basis! This seems absolutely ridiculous, and I'm just wondering if I'm missing something as a potential solution.

My understanding is that your example would trigger PBGC coverage. I believe they consider a participant (for determining coverage) to be anyone who is accruing benefit service. Whether they actually accrue a benefit is irrelevant. If you think about it this way, it makes more sense - someone who enters at January 1 (who will be benefiting >$0) is considered a participant at January 1 for counting purposes for determining coverage. They haven't accrued anything yet, but they are still counted. So this seems to make it clear that the amount they will benefit (whether $0 or more) doesn't matter. Regardless, laws are not always logical and consistent, so I'd be curious if anyone has any direct experience that either confirms or denies my understanding. Thanks in advance.

I read up on floor offsets quite a bit last year. 415 applies to the gross benefit. I think this probably does make sense if you look at it this way: Let's say that the DC assets completely tanked and became almost worthless (extreme scenario and unlikely, but helpful for illustrating the point), resulting in a DC offset of almost nothing. If the gross DB benefit is in excess of 415, then it will be in excess of 415 after the tiny offset. If the gross DB is not in excess of 415, then it won't matter how small the offset is. I'm sure good arguments could be made for why it should be the net benefit, but everything I've seen indicates it's gross.

Agree with Lou S. The plan becomes not covered. Whether or not you submit to PBGC to get a formal determination (in which case they will tell you it is not covered as of the date the sister is cashed out) is irrelevant. Also, I agree with Mike Preston regarding the original post being correct. Source: I have been through a case like this with PBGC.

BCG Pension Risk Consultants is another company that does this. (I'm not affiliated with any of these companies, and I'm sure there are more, but just throwing out another name I know of.)

Thanks, Effen. "Dream crusher." I like that.

Working on starting up a CB plan for a doctor group. For whatever reason they want to start out with small contributions in year 1 and then increase starting in year 2. They know the specific amounts they want to do for each doctor in each year. Is there any issue with setting up the document to say "effective 1-1-17, this is the pay credit," and then have a second paragraph that says "effective 1-1-18, this is the pay credit"? Assume that the 1-1-18 pay credit is intended to stay in place for awhile, and that we're all good as far as any testing or 415 issues go. I don't think I've seen a plan document set up like this before, but I'm trying to figure out how it'd be any different than simply listing the initial 1-1-17 formula in the document and then doing an amendment. Does it make a difference to the IRS or for any other purpose? Is it recommended to do an amendment, but wait until 2018 to do it for whatever reason? I'm thinking there shouldn't be any problem setting up the document with both formulas, but want to make sure I'm not overlooking something.

This makes a lot of sense. So much sense that it seems like it should have been obvious. Sometimes you dig yourself so deep into the words that you confuse yourself. Thanks!

Thanks for posting this. This is in line with what I can find, but it still doesn't seem to address the basic question at hand. I would argue that the bolded above seems to only apply to when certain employees have different NRA definitions than other certain employees. At least, that is a literal reading of it in my opinion. But I suspect that the intent of the code is that you take the later of the two retirement ages. That just seems like the thing that makes the most sense.

Thanks for the responses. I don't question that 65+5 is uniform. It is. My general question is if the DB and DC plans both have uniform retirement ages, and both uniform retirement ages are different from one another, and all employees have these same retirement ages in each plan - then is the testing age: a) the later of the two b) age 65