Cash Balance Court Case

[Guest JimmyP]

I thought IRS Notice 96-8 allowed plan sponsors to use 1-year treasuries plus 100 basis points with deemed compliance with 417(e), am I wrong or was this Notice changed???

[MGB]

It still applies. Why do you think it has changed?

[Guest Doug Goelz]

The quick write-up that I saw on the Xerox cash balance court case stated that interest credits were based on an average of the one-year Treasury bill rate for the previous year, plus one percent.

[MGB]

One must take extreme caution in reading short summaries. This is a very complex arrangement.

There were originally two different plans; a floor-offset arrangement between a DB and DC They merged together in 1990 and created a 414(k) plan (a DB plan with a side DC account). The DB part of the 414(k) plan was converted to a cash balance plan, and continued to be a floor-offset arrangement with the other side of the 414(k).

There is also a third formula which wasn't really part of the main floor-offet calculation, although part of the court case. It was an additional cash balance formula for certain members and was within the same overall plan. There were other lump sum issues associated with this plan (using 120% of PBGC rates).

In projecting an annuity, the cash balance plan projected using the same PBGC rates as used in lump sums (this is pre-effective date of GATT and pre-Notice 96-8). At the time in question, the PBGC rates would have been lower than using the interest crediting rate. Adding to the complexity, if the cash balance was less than the DC account, they didn't even do this projection and just used the two account balances as a floor-offset.

There were other twists and turns in this.

Bottom line is that the courts said they must project both account balances into an annuity and then do the offset. At that point, discounting back at the appropriate 417 rates apply. The approaches in Notice 96-8 to deem compliance are irrelevant in a floor-offset situation.