Converting a direct rollover to an initial cash balance

[Guest Mike Melnick]

A group of new employees (acquired through a corporate acquisition) become immediately eligible to participate in the company's cash balance plan. Suppose these new employees have the right to roll over lump sum distributions from the prior employer's qualified plan.

Can the receiving plan grant these employees the ability to convert the rollover balances into a starting cash balances? If so, do you think it would be necessary to create a minimum balance based on maintaining a separate account?

One more complication. What if the receiving plan only wanted to accept the roll over on the condition that the employee also agreed to convert it to a cash balance?

[Christine Roberts]

See this thread:

http://benefitslink.com/boards/index.php?showtopic=5430

[Mike Preston]

Also note that the 415 regs specifically authorize the practice of pushing a DC account balance into a DB plan in return for an actuarial equivalent promise of an annuity. The annuity does not count against the defined benefit dollar limit.

[mbozek]

About 5 years ago Bank of America offerred its employees a opportunity to transfer 401(k) account balances to a cash balance plan which permitted the employees to select the same investments in funds that were available under the B of A 401(k) plan. BofA promised that the value of the transferred assets would never fall below the opening account balance on the date of transfer and the transferred accounts were booked as an increase in DB plan assets with no offsetting liabilities which allowed B of A to show an increase in surplus plan assets which was credited to the corp. earnings for the quarter in which the transfer occurred.

[Mike Preston]

Well, while I agree the net impact at the time was to increase DB assets relative to liabilities, I seem to recall that the assets were not booked with zero liability. I think there were offsetting liabilities. It was just that the liabilities were less than the assets.

The regulations are silient when it comes to how the promise compares to the expectation. A plan sponsor could use a modest promise combined with optimistic expectations to do just what BofA did. Another plan sponsor might reverse it to enrich an overall benefit.