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Hi all, Wanted to start a discussion on what future interest crediting rates would be considered reasonable assumptions for funding valuations for Market Based Cash Balance Plans. These plans are designed to reduce risks of underfunding but if the assets are aggressively invested and, depending on the method of determining a future return assumption, the assumed future interest crediting rate could be higher than the relief funding rates resulting in minimum required contributions greater than the pay credits. Is anyone aware of any regs or approved methods for determining a reasonable future interest crediting rate that would not result in unreasonable underfunding results and minimums greater than actual pay credits? It seems applying a 6% cap on the projected ICR would be reasonable considering the new legislation in Secure 2.0 but this is still high. Curious if anyone ties the projected ICR to a segment rate similar to how the future ICR would be determined at plan termination for market based rates? Goal is to avoid underfunding results when the plan sponsor is funding the annual pay credits and the plan has a more aggressive asset mix.

Single-member LLC that has elected to file as S-Corp has a cash balance plan that covers the owner and a handful of employees. The contribution for the 2021 plan year was deposited on March 10, 2022. The deposit was for the recommended contribution calculated by the actuary. The CPA who is preparing the tax returns for the business is telling the owner that the contribution applicable to the owner's benefit cannot be deducted for 2021 and must instead be reported on the 2022 tax returns. The returns are otherwise being completed on an accrual basis. I am neither a CPA nor an actuary, but I've been a TPA for a long time and I've never heard of this. I didn't even bother asking how the CPA determined the portion applicable to the owner. Is there a rule preventing the business from taking a tax deduction for the portion of the accrued cash balance contribution that is applicable to the owner's benefit?

A group of physicians is considering a cross-tested combination, 401(k) and cash balance. One owner-doctor is Muslim and is questioning the hypothetical interest on the allocation when expressed as a fixed-rate. He is fine with the 401(k) assets being market-driven, but has concerns about the cash balance allocation. 1. Anyone ever handle anything similar? 2. Can the hypothetical interest be 0 for his allocation class or is that a reduction? 3. Is there a better way to explain the interest part that may avoid his objection?

I have a CPA asking for advice on completing the tax returns for a client who has a cash balance plan (I thought that was a CPA's area of expertise, but I digress). Plan sponsor is a LLC filing as a sole-proprietor. The CPA wants to know how much of the cash balance contribution applies to the owner and how much applies to employees. He is also asking if it is appropriate to report the owners "portion" of the contribution on Schedule 1 of the 1040 while the amount applicable to employees will be reported on his Schedule C. 1. Is it proper to report part of the cash balance contribution on Schedule 1 instead of reporting it all on the Schedule C? 2. If the answer to #1 is yes, how do we break down the cash balance contribution between the owner and employees? I am neither an expert on tax returns nor an expert on DB plans. I tried to figure this out from Publication 560 and it does say "Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1" but I'm not certain if that is referring to just DC plans.

If a plan purchases an annuity for a participant to remove them from the plan, does the plan still have to issue a 1099-R? Would it show the annuity purchase amount and that it was not taxable? I know the annuity company will issue a 1099-R for the payments the participant receives, but what about on the plan's side?

One of our current plans is asking about the possibility of adding a Cash Balance to their existing Safe Harbor 401(k)/Profit Sharing Plan. They are a medical practice with 115 participants. 10 Doctors and 105 non highly's. They currently have a SH Match with a Profit Sharing in place to maximize the Doctors allocation. They are wondering if it would be possible to add in a Cash Balance plan for the Doctors as they wish to put away a higher annual contribution. I do not have much experience with CB plans so i am wondering if this is possible? And if so how many of the NHCE's would need to be included in the CB? Also of note, they may be merging with a group of 4-5 other medical practices a couple of years down the road possibly becoming a controlled group. The other practices have plans in place however I don't know if any of them are CB plans. I know that they all have 401k plans in place but i don't know if any of them have CB plans as well. What type of issues if any could arise in this situation?

A law office has two partners, and a new associate who is in his late 30s. 3 NHCE staff are in their 20s and 60s. The new associate, who is a go-getter, got a lousy Profit Sharing contribution for 201, and was unable to benefit in the Cash Balance Plan. He is unhappy with this outcome. The partners want to keep him happy. In terms of plan design, could we: Exclude the new associate from the CB plan (he isn't benefiting anyway). Amend the DC plan to exclude the partners, and change from a cross tested allocation to a design based safe harbor, such as an integrated allocation, so that the young associate can get a larger allocation in the DC plan. If we were to do this, must we still combine the plans for 401(a)(4), or is the DC free from that requirement because it isn't subject to 401(a)(4), and the other HCEs aren't benefiting in that plan? In other words, there is no crossover between the two plans where HCEs are concerned, so does this give us some wiggle room for the young associate? By the way, the associate is not Key. Thanks!

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.

There's a cash balance plan with the annual benefit going to the owners (HCE's) in the plan that is above their 415 limits. If their benefit is limited, the thought is to have the plan buy each of them an annuity with a X% surrender charge. This would make the taxable distribution effectively identical to the 415 limit. The annuity would be transferred to them for conversion to an IRA after IRS approval was received. We would offer this identical distribution to the other participants. Any thoughts on this?

Cash Balance Plan with in-service distributions at NRA allowed. Owner is going to start taking an annuity form, then convert to a lump sum when the plan terminates. While they are taking this annuity, are they able to take the full yearly amount once per year to satisfy? Or do they have to take monthly payments?

A plan sponsor has a Cash Balance Plan and 401(k) PS plan with a 3% safe harbor allocation. The PS plan has a cross-tested allocation with 7 different allocation groups. The plan was not designed to have one group per participant because the plan sponsor is a Partnership and the IRS has stated that this may not be appropriate (separate discussion). The two owners and two employees are included in the CB plan. 4 additional NHCE employees are excluded from the CB plan, but are included in the 401(k) PS Plan. The special gateway is 7.5%. For the 4 employees NOT in the CB plan, they receive the 3% safe harbor plus 4.5% profit sharing to meet this gateway. The 2 employees in the CB plan only need 2.7% in PS to pass testing. This leaves employees in the same PS allocation group receiving different PS percentages (4.5% vs. 2.7%). I would not have thought that this was okay because the 401(k) plan document states that all employees in the same group should receive a pro-rata allocation with the group (i.e. same %). Are there special rules that allow us to give differing % in the same PS group if it is merely bumping up the allocation for some employees to meet the minimum gateway? If we are allowed to give different percentages, does it require an 11(g) amendment? Our actuary says no, but I am not 100% convinced.

I have the opportunity to start my own TPA firm and I really need some help. I have been a pension admin for some time now and have a firm grasp of the administration side. I have been offered an opportunity to join a CPA firm and partner with them to start a TPA firm. I have done the grind and put together all the paperwork for new clients, takeover plans, safe harbor notices, etc... I have ASC coming and installing their programs and I will accompany that with Pension Pro software. So I have almost everything lined up to move forward. My question is: #1 - Do I have to have certain credentials to be able to start my own TPA firm? I have one more test to get my APA designation, but is there something that would stop me from being able to open my own firm? #2 - Besides all the proper paperwork and setting up the software, is there something i could be missing that would be a road block or set back? #3 - What advice can you give me that would help me avoid pitfalls or help me not miss something while setting up the new firm. #4 - Would someone be willing to have a conference call with me and go over the steps they went through to start their own firm? In a nut shell, I just need some guidance so I don't have a surprise pop up that would not allow me to open the new firm. I would really appreciate all the help i can get to start off on the right foot. Thanks!!

There is a cash balance off-set plan with a participant count of 32 before the offset. After the offset, there is only one participant receiving a benefit under the cash balance side of the plan. When counting participants for the PBGC flat-rate premium, would we use the number of participants receiving a benefit before or after the offset?

I've read some older dialouge (2007 and earlier) here about the requirements for a separate EIN/TIN for plans, and I've even recently posted on a dissimilar situation from what I'm asking now. Since the schedule P has been eliminated, I've seen most custodial trust accounts for newer pension/cash balance plans setup with whatever firm (TD, Schwab, etc.) using the ER's EIN to setup the ERISA trust account. The "experts" at these firms also acknowledge that no separate EIN is required. However, when I go to the IRS website, it appears to REQUIRE a separate EIN for the trust. It appears that there is a wide range of thought on this subject, and even two ERISA attorneys I've spoken with recently have questioned the necessity to establish a separate EIN other than a possibility of income reporting issues. Does anyone have any substantive clarification on this?

Example: 4 family members own a s corp biz (mom, dad and adult children), no other EEs. They currently pay the same salaries for all 4 (~30k/yr). They sold the assets of the business (~1.5M) early this year but retain the entity, which is now flush with cash. Just over 1M is not basis so subject to form 1231 cap gains.In order to minimize cap gains, we are considering a combination of 1) reallocation of equity (gifting some by parents to children using small part of lifetime gift exemption before eoy to keep cap gain liability at 15% (they should have gifted the equity before the sale but besides the point), and 2) starting a k/ps/cb plan to reduce AGI from 1120s, but naturally considering adjusting comp before eoy to get to funding levels for the ps/cb that make sense. Since the income of the business was minimal (sold early in the year), they will show significant loss of income in the business due to ER contributions to owners for ps/cb plan. However, they own several other businesses (no EEs other than the same owners) that will pay a management fee to the original co or the original may just become a holding co for the rest, to be determined, but income will flow into the entity after this year. My question is: 1) is there a limit to deductibility for ps/cb plans for an all owner/family relation company w no other EEs? 2) can losses due to contributions be carried forward like other corporate losses? Thx!

I am a FA and I was referred to clients of a CPA. These individuals own multiple business entities, primarily in real estate. The only EEs of all companies are the owners (parents, 60's) and their two children (30's), also owners. Ignoring control group/affiliate service for the purpose of this thread, they are interested in starting a CB or Combo plan for the purpose of defraying taxes and purchasing Real Estate. They have no interest in investing in "traditional" securities or any other assets other than RE. Aside from the the usual issues related to owning RE in a retirment plan (PTs related to income/expense flow, management, can't "contribute" RE assets, etc etc) I have a few concerns because I have never had a client with an interest in investing solely in RE in a QRP. First, I am concerned that it would, at a minimum, violate ERISA's "duty to diversify". Second, I am concerned that the IRS will view this unfavorably by default. Third, I believe that legal issues, valuation issues and related expenses may outweigh the benefits. Fourth, I am not aware of any trustees and/or custodians, apart from SD-IRA's and some uni-k's, that work with this. Has anyone else had or heard of a situation like this? Is there something else that I should also be concerned with? I will undoubtedly be reaching out this week to local TPAs and ERISA attorneys I have worked with in the past, but I am interested in some feedback from the community. Thank in advance for your responses.

The vast majority of DOL guidance about when it may be appropriate to pass through eligible administrative expenses to the participant directly affected by the administrative action is limited to defined contribution plans. Question has come up whether you could do the same under a cash balance plan (assuming the expense is reasonable, it's reasonable to assess it to the particular person involved, etc.), which is, of course, a defined benefit plan but does have individual accounts. The only thing I can find on whether you could pass through expenses in a DB Plan is an informal DOL staff comment saying yes, specifically for the expense of QDRO administration, but would need DOL and IRS guidance on the issue. Has anyone seen any other guidance or comments on the issue?

In a 401k plan, I know you are allowed to charge the participant a fee directly for taking a distribution. Are we also permitted to also charge the participant of a defined benefit plan a fee as well, or if a fee is to be charged, does it have to be charged to the plan? Thanks for your thoughts.

I have a cash balance plan with only a husband and wife (they have no employees). Since there are no NHCEs, does that plan still have to be 100% funded in order for one of them to take a distribution?

I was told an EA conference speaker mentioned that when applying the 31% deduction limit for a combo plan, that you can only use the participant's compensation if they are receiving an employer contribution in either plan. For example, I have a plan that is not Top-Heavy and they are not giving the HCEs an employer contribution in either plan but they are able to contribute 401(k). He is saying I would not be able to include their compensation when calculating the deduction limits. I wanted to use the 6% limit on the profit sharing contribution. The HCEs are not excluded they are just in their own class and get 0%. Would I not be able to use their compensation in calculating the maximum deductible contribution?

If I want to write the plan document so that it gives the Owner's the maximum lump sum under 415, do I need to include how that is calculated. Basically, we want the owner's to get the max each year without having to amend each year. Is there a better way to write it so they owner's get the maximum allocation? Thanks for your input.

Based on the regulations that came out this morning, it looks like a fixed interest crediting rate of 6% is allowed under the regulations for a hybrid plan. What I would like to know is when this is effective. The regulations are generally effective January 1, 2016, but it also states "The rules in these final regulations that merely clarify provisions that were included in the 2010 final regulations apply to plan years that begin on or after January 1, 2011, in accordance with the general effective/applicability date of the 2010 final regulations). In addition, these regulations amend §1.411(b)(5)-1 to provide that §1.411(b)(5)-1(d)(1)(iii), (d)(1)(vi) and (d)(6)(i) (which provide that the regulations set forth the list of interest crediting rates and combinations of interest crediting rates that satisfy the market rate of return requirement under section 411(b)(5)) apply to plan years that begin on or after January 1, 2016. footnote 9" footnote 9 says: "The 2010 final regulations provide that these particular provisions apply to plan years that begin on or after January 1, 2012. The intention to delay the effective/applicability date of these provisions was announced in Notice 2011-85 and Notice 2012-61. Notice 2012-61 announced that these provisions would not be effective for plan years beginning before January 1, 2014. So, can the use of a 6% fixed rate be relied upon in 2014 or 2015?

I have client that is planning on terminating their cash balance plan. If participants in a cash balance plan accrue the benefit after 1000 hours, and the plan terminates 9 months into the year, are they only entited to 9/12 of a benefit? If so, we will wait until Decemebr 31 to terminate, if not we will start the process now. I know for profit sharing plans, if the plan terminates 9 months into the year, the max profit sharing of $52,000 is reduced to 9/12 or $39,000. Thanks

If the IRS disqualifies a prviously qualified plan: 1. If a participant was an NHCE then bcame and HCE only in the last year, is his full benefit taxable? 2. Of the taxable distribution, is he required to pay a 10% penalty is he is under age 50?

Can anyone help me understand Notice 2011-86 and §7528(b)(2)? I don't want the client to have to pay the $2,500 user fee if it isn't necessary. I am trying to prepare a Cash Balance plan determination letter request. It is a Cycle C filer that is due Jan 1, 2014. There was previously an issue that caused the plan to do a VCP submission and off-cycle DL filing two years ago, which did result in a favorable DL. The plan was first in existance 1/1/2003. Most things seem to reference a 5 year period for the fee exemption, but Part III provides "the Service will treat an application as having been filed by the last day of the remedial amendment period with respect tot he plan beginning within the first five plan years if both the following conditions are met: (1) the application is filed with the Service by the last day of the submission period for the plan's current remediate amendment cycle, and (2) the plan is first in existence no earlier than January 1 of the tenth calendar year immediately preceding the year in which the submission period for the plan's current remedial amendment cycle begins." Since the plan was effective 1/1/2003, and that the cycle ends 1/31/2014, it seems to be that the exemption applies, and no user fee is due. Is there something I'm missing? I can't seem to find anything that indicates it has to be the initial DL submission for a plan. Does the fact that this plan has had previous DLs affect the fee exemption? Thoughts?