Transition Credits and Non-Discrimination

[Guest JimmyP]

I have a client who is interested in a Cash Balance conversion. The new plan will feature a flat 13% pay credit and tie interest credits to 30-year Treasuries.

In transitioning to the new plan, the opening balances are calculated as the PVAB under the prior plan using the applicable GATT rates. On top of this, if a participant's projected PVB (yes, PVB) on the new plan is less than the projected PVB under the old plan, the client wants to give a transition credit equal to the dollar shortfall.

The problem is that 59 of the 66 HCE's (89%) in the plan are eligible for this very generous transition credit while the NHCE percentage is very small, about 19%. Does anyone have any suggestions on how to handle the discrimination testing? The intent is that all participant's will not be hurt by this conversion.

Thanks

[Guest Steve C]

Interesting design.

Is the transition credit included immediately in the opening cash balance, or will it be phased in? If the latter, the effect may be similar to continued operation of the old formula (working as a floor), which should be less problematic. Immediate recognition would provide quite a windfall, especially for younger participants.

- Steve

[MGB]

Sorry, I do not have answers for your questions (with more time, I might, but am on the run).

However, 30-yr. treasuries should be stayed away from.

They are no longer being issued. The government is buying them back up. A commission looking at all of the debt issued by the government recently recommended stopping them completely because there is no debt projected to be owed by the government in fewer than 30 years (of course, this was before EGTRRA).

There is a lot of activity and lobbying (AAA, ABC, ERIC, etc.) to pull 30-yr treasuries from all laws because they are getting to be artificially low in return due to this buy-back and the problems that will be created when they go away.

[david rigby]

Hmmm. I also need more time to digest this, but it looks to me like a plan whose benefit is defined by the greater of formula A or formula B. Not sure that causes discrimination, although the change could be considered discriminatory under 1.401(a)(4)-5.

Also, potential for problems with backloading.

[Guest Steve C]

I wouldn't expect to find discrimination under (a)(4)-5 if this is a "greater than A or B" design (or if the transition credit is being phased in through some other means).

I suppose there is some potential if the new cash balance formula is richer than the old formula. However, the switch to cash balance (sans the transition credit) will skew benefits in favor of younger participants. Assuming that HCEs are generally older, they may find that the new formula provides little or no additional benefit in comparison with the old. NHCEs would tend to be more richly rewarded by the amendment than HCEs, and current HCEs may be little (or no) better off than former employees (leading to my expectation of no -5 discrimination).

Just thinking out loud...