Cash Balance Plan termination; how to value participants' accounts for distribution purposes?

[Guest penman]

I am doing my first cash balance plan and it was terminated by amendment effective 12/31/02. The plan credits interest based on the 30 Yr Treasury rate in effect for the plan year. I have calculated the AB at 12/31/02 based on the 2002 interest rate. Would I use that 12/31/02 AB to cashout the participants in 2003 (using the 2003 interest rate and mortality basis for the lump sum) or would I project the account balance to NRA and discount it back to the date of distribution based on the rate in effect for 2003 to get the AB and lump sum? The results are different. The document doesn't seem to address this specific issue.

I would think I should use the 12/31/02 accrued benefit (at the date of plan term) to calculate the lump sums just like any other DB plan.

Any input is appreciated!

Incidentally, the client expressed in writing that they don't want to file the plan term with the IRS.

[Mike Preston]

You are doing your first cb plan termination and your client doesn't want to submit?

If this were not a cash-balance plan would you use the 417(e) rates from 2003 or 2002 if you were paying out in 2003?

[Guest penman]

"You are doing your first cb plan termination and your client doesn't want to submit?"

What are trying to say Mike Preston?

The question isn't about what interest rate to use, it's about what AB to use.

[Effen]

Did they submit the Plan for approval when they adopted it? I find it hard to believe that the IRS approved the plan without some definition related to the calculation of the benefit. (I know, just because they appoved it, doesn't mean they read it.)

On the cash balance plans I work with, the cash out would be based on the cash balance at the time of payout. I understand your question, but if your document is unclear, I think you have a problem.

How did you calculate the payouts for terminated participants? Why would you do anything different due to the Plan term?

[Mike Preston]

What I'm trying to say is that you obviously have some questions about this plan. What to _you_ think the purpose of an IRS submission is?

[IRC401]

My vote is that you use the accrued benefit (expressed as an annuity at Normal Retirement Age) as of the date of plan termination, and if payment is to be made in a lump-sum, you would discount back using the interest rate for the date of distribution (not the date of termination).

I have no authority for that position, but: (1) isn't the benefit frozen as of the termination date, and (2) I am not aware of any reason not to use the interest rate for the date of distribution. BTW by termination date I am referring to the plan termination date that you used when you filed for a standard termination, and I assume that the PBGC will not object to the date.