Cash Balance - Interest Accruals

[IRC401]

I inherited a cash balance plan in which it appears that "interest" accrues only to the date of termination of employment, not until Normal Retirement Age. (After termination of employment the interest rate is zero.) I understand that the IRS doesn't like these plans and that there may be serious problems, but I haven't been able to find anything in writing.

Can anyone give me a summary of the problems or point me in the direction of a good ruling or article?

Thank you.

[mbozek]

Under reg 411(a)(11)-11©(2) a participant's voluntary consent to a distribution of a benefit in excess of $5,000 is invalid if the plan imposes a significant detriment on a participant who does not consent to such a distribution. Ceasing to pay interest on a participant's CB account balance after termination would be considered to impose a significant detriment in violation of the above reg. See Rev. Rul 96-47 - paying only mm rate of interest on participant's CB account after termination instead of rate stated in plan for active participants violated the 411(a)(11) regs. Failure to comply with the regs is a disqualifing event.

[Gary]

the only documented authorization that requires interest credits after termination that i know of is irs notice 96-8.

and apparently law suits have been won in favor of the plaintiff, to uphold and follow 96-8.

[mwyatt]

I really don't want to start a fire storm here, but how could you possibly stop interest on the lump sum at termination. If I recall, these are defined benefit pension plans (basically a year by year career average with a continually decreasing accrual percentage). At the time of termination, one could convert the "cash balance" to an equivalent straight life annuity at NRD. Now one year later, one would assume that the SLA would be unchanged, but by not crediting interest the SLA has decreased by the assumed rate of interest. What am I missing?

I also assume that one could make the case given this logic that a money purchase plan could stop crediting earnings after someone terminated employment. No wonder everyone has their arms up in the air over cash balance plans.

[IRC401]

There is apparently a debate somewhere (but maybe not in writing) as to whether the accrued benefit in a DB plan can be defined as the cash balance "account". In such a case the "accrual" would be the account without interest.

Since I posted my question the IRS has come out with 75 pages of proposed regs that I have yet to muddle through. I hope that they will deal with my question.

In any event, in a defined contribution plan a participant has an account, with assets, and the trustee has a fiduciary duty to invest the assets. The participant has a legal entitlement to the investment return on the assets in his account. To deny the participant any investment return after he terminated employment would, in my opinion, be theft (although I should note that there is a circuit court decision, Hickerson v. Velsicol Chemical (?) that might allow someone to reach a contrary conclusion).

I wish everyone a happy holiday season reading the proposed cash balance regs.