Brain Cramp - Cash Balance and Current Liability

[mwyatt]

Running into a brain cramp here and want to make sure I'm passing on the right information.

A lawyer asked my opinion on a proposed design for his law firm on a new cash balance plan. They plan on using very conservative interest crediting assumptions coupled with conservative investments to avoid any underfunding exposure (and also sidestepping any "whipsaw" issues). One comment by the consulting actuary who had proposed the plan is the top 25 restrictions under IRC 1.401(a)(4)-5.

In this situation we can assume that cash balances roughly equal assets by design. My thought would be that you convert the cash balance to a SLA benefit, then value using 83 GAM and F and the RPA '94 CL interest rate (90-120%). The conversion to SLA would be done using the plan assumptions, then valued using CL assumptions on the resulting SLA accrued benefit. Presumably (unless we have an inverted yield curve), the spread between the plan interest rate and 120% of the weighted rate would put us comfortably over the 110% threshold that would trigger the top 25 restrictions.

Am I reading this right or do you take the cash balance and convert using CL assumptions to SLA and then revalue using CL assumptions to end up back where you started (in which case you would be nailed given the client's proposed investment strategy)?

[MGB]

You are converting correctly, but not doing the CL correctly. The plan must define what the annuity amount is and then it is valued. The cash balance is irrelevant to the CL calculation other than to help define annuity amounts at various times in the future.

Note question 4 from the 2003 EA Meeting. You use the plan's mortality for the CL calculation (from annuity back to date of decrement) if your assumption in the regular valuation is that everyone will take a lump sum at decrement. You use CL mortality prior to that when active (if applicable).

Gray Book2003 -- Q&A-4

Funding: Application of Notice 90-11 to RPA ’94 Current Liability

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QUESTION 4

Funding: Application of Notice 90-11 to RPA ’94 Current Liability

When calculating current liability, Notice 90-11 requires the use of a qualifying current liability interest rate for purposes of calculating benefits in a form other than a non-decreasing life annuity. For example, assume a plan allows lump sum payments and the valuation assumes that participants take a lump sum upon retirement. For purposes of calculating the current liability the lump sum must be determined using the current liability interest rate – regardless of the rate specified in the plan for converting the plan’s annuity benefit into a lump sum.

RPA ’94 added a required mortality table to the current liability calculations – currently the 1983 GAM male and female tables. For purposes of calculating the RPA ’94 current liability, must this required mortality table be used to determine the benefit in a form other than a non-decreasing life annuity? In the example above, would the lump sum valued in the RPA ’94 current liability be calculated using the current liability interest rate and the sex-distinct 1983 GAM table?

RESPONSE

No. The interest rate requirement in Notice 90-11 does not extend to the required mortality assumption, so that the lump sum valued in the RPA ’94 current liability should be based on the mortality table specified in the plan to convert the annuity benefit into a lump sum. Thus, the 417(e) unisex mortality table must be used for this purpose.

[mwyatt]

Thanks MGB. Could you clarify this a bit for me? I think my gut reaction that, if the CL i% is higher than the plan i%, the resulting CL should be less than the "cash balance" is correct (in which case the 110% threshold should be met).

So assume I have a person with a cash balance of $100,000. The plan rate for the year is 5%, mortality table is 94GAR.

I would first convert the cash balance to a SLA to the participant's age. For sake of argument, let's say this amount is $10000/year. To value for RPA '94 Current Liability, I would then value $10000/year using (from your question) 94GAR, rather than 83GAM/F since LS is the assumption, but I would use the CL rate (say 6.5%). So my resulting value is say $85,000, due to the higher rate. Am I on track?