Interest credit for cash balance plan

[Gary]

A cash balance plan doc says interest credit is 4%. However, every year since its inception they have added an ad hoc amendment to provide for an interest credit of 8%.

Should this now be a permanent plan feature or amendment? i.e. any precedent? Or could this be considered a 411 forfeiture in accordance w/ 96-8?

Any comments out there?

[Guest Harry O]

I would think that this is an additional accrual in the year of the amendment. Depending upon the plan formula, this may cause backloading problems.

[Gary]

Thanks for your response Harry O.

I am reviewing pension for a former employee who recevied a distribution from CB Plan.

The Plan defines interest credits to be based on 1 yr treasury with a minimum of 4%.

However, since the Plan's inception in 1992, they have used 8% for annual interest credits, by means of an ad hoc annual amendment.

Should 8% be used to project balance to 65 for this terminated employee? That is, should the 8% be considered part of plan provisions as a permanent amendment? Is this a case of a 411 forfeiture? Or is the Plan sponsor correct?

Plan Administrator says no, since the 8% is not part of Plan, but only a temporary provision. And the lower rate stated in the Plan s/b used.

[Guest Harry O]

There seem to be two issues. I think you are thinking about the first issue -- does the pattern of repeated amendments to the plan crediting the additional interest mean that this allocation is part of the employee's accrued benefit? This is a tough issue and I don't expect you'll get a plan sponsor to cave on it without a lawsuit or IRS audit. But you could waive the repeated window benefit provisions of the 411(d)(6) regs in their face for support.

The other issue is that these ad hoc credits could cause the plan to fail backloading (depending on how steeply graded the allocation formula is). You can run this test yourself and see if there is a problem.