Average Group Age Determines Benefit Level

[WDIK]

I have been presented with a defined benefit proposal that groups participants based on job classification and then determines benefit levels based on the group's average age. (The purpose being to make the same contribution amount on behalf of each partner even though their ages differ.) This plan will also operate in conjunction with an existing 401(k) profit sharing plan.

I am not familiar with the concept of determing benefits based on a group's average age but would like to be able to respond to the proposal semi-intelligently (at least insofar as that doesn't exceed my actual capability).

1) Am I correct in assuming that such an arrangement must fall under the category of a cash balance plan?

2) My search for "average age" in the Code and Regs was fruitless. Where is this method addressed?

3) Are there some other reference materials to which someone could direct me?

4) Are there any strong opinions (negative or positive) about such a scenario?

5) Any caveats to worry about (besides normal testing or deduction issues)?

Any and all responses are greatly apprecieated.

[Blinky the 3-eyed Fish]

1) No, you wouldn't have to determine the benefit levels by age if this were a CB plan.

2) Nowhere.

3) Sorry, see your closest actuary.

4) See the next answer.

5) Be wary of ADEA issues.

[WDIK]

Follow-up to response 2.

If the method is not addressed, what is the basis for justifying its use?

[AndyH]

I'd like to hear a little more about this. What exactly is being defined by group, the benefit level or the contribution? And if it is a benefit level, does that level change when one advances to the next age group? Now obviously since it's a proposal some of this could be disguised, but I think that the answers to your questions depend upon the answers to mine.

[WDIK]

AndyH:

All I have to go by is a faxed copy of a faxed copy of a proposal, but I will try to glean the answers to your questions from what is available.

Participants are grouped together based on job classification. In this case it looks like the groups are: Partners, Associates Attorneys, Everybody Else. (Although only contributions for the partners are illustrated.)

The illustration goes on to show an annual $80,000 contribution to the defined benefit plan for each partner. This is in addition to a $40,000/each DC annual addition. Finally a DB accumulation at retirement of $1,054,000 is shown.

One of the several things that doesn't make sense to me is that the DB accumulation at retirement is the same for everyone when the parnters ages are different. The ages of the partners are approximately 62, 48, and 46. (Not shown, but verbally communicated by faxer.)

[AndyH]

Sounds like a typical cash balance plan to me, albeit with an inaccurate accumulation as you suggest, but maybe the accumulation is intended to be as of the end of so many years?.

It certainly isn't a DC plan and it sure doesn't look like a normal DB plan. Is the 46 year old getting the same as the older partner? Sounds like that might approximate a 415 limit.

My knowledge of and experience with cash balance plans is limited, but from what you are describing, I'd say that the normal pro's and con's of cash balance plans, including the legal uncertainties, apply.

[WDIK]

I inferred (perhaps incorrectly and/or inappropriately) from Blinky's response 1 that it wasn't a cash balance plan because of the benefit levels being determined by the average group age.

According to the illustration the 46-year-old is getting the same contribution and accumulation as the 62-year-old.

Could they be trying to show some kind of floor-offset scenario?

[Mike Preston]

I think determining the benefits on the basis of the group's average age is nothing more than a smokescreen. How they determined what the basic benefit should be is sort of irrelevant. The fact is that they decided upon $80k per partner and they are seemingly doing so for each partner, notwithstanding the partner's individual age, so it sounds like it is a CB plan.

[Blinky the 3-eyed Fish]

Agreed that it sounds like a CB plan for sure. That whole thing about determining benefit levels by a group's average age is hooey.

[Mike Preston]

One actuary's hooey is a another marketer's sale.

[WDIK]

Thanks for your comments. I thought I had missed some groundbreaking innovation in retirement planning.