cash balance lump sum

[Gary]

in looking over an individual's pension entitlement.

company A merged into company B on 1/1/95. accruals after 1994 are based on the cash bal provisions of the company B plan.

employees of company A prior to merger have 12/31/94 benefits grandfathered and receive additional separate accruals after 1994 under plan B.

12/31/94 plan A AB is also converted into a cash balance and receives only interest credits and at ASD the balanace is compared to pv of 12/31/94 AB. the cash bal in plan A gets 11% int credit while employed and 8% int credit after term and prior to ASD.

using 11% for actives and 8% for terms seems to violate some cash bal requirements. for one thing it seems to now fail the 411(B) accrual rules and according to 96-8 it seems to result in an impermissible forfeiture as mandated in 1.411(a)-T for understating the post termination interest credit rate.

so, bottom line it would appear the plan s/b required to maintain 11% after term as well.

the plan paid the term employee the pv of 12/31/94 ab plus the plan B cash balance at ASD. however, if we take the plan A cash bal, increase it at 11%, convert to age 65 annuity, the pv of such ben is greater than the pv 12/31/94 ab.

so it would appear there could be a claim for additional benefits for this individual.

any other observations?

[Blinky the 3-eyed Fish]

I have heard of cash balance plans with determination letters that credit active employees with a "supplemental interest rate" for remaining employed. While this may not state that explicitly, it is operated similarly.

[MGB]

Even the new age discrimination proposed regulation on cash balance plans recognize the existence of different crediting rates between active and term vesteds. That does not mean they will automatically pass accrual rules...it doesn't mean they automatically fail either.

Also note that Notice 96-8 is just that...a Notice. It is not a regulation and carries very little weight legally (although some recent court cases have inappropriately pointed to it).

[IRC401]

I am not certain that I completely understadn what happened.

If the sponsor wants to use an 11% interest rate while employed and an 8% interest rate post employment, that should be permissible, but for purposes of the (a)(4) general test, it would use an 8% interest rate and treat the difference between the pre and post interest rates as a current year contribution.

It isn't clear to me whether the A employees get their Plan A accrued benefits plus the cash balance benefits or whether the Plan A accured benefit forms a floor. Is the benefit the sum of the two benefits or is there a "wear-away" period?

In any event a lump-sum should have been calculated by projecting the cash balance forward at 8% and discounting back at the "applicable interest rate".