MEA CALC AND CASH BALANCE PLANS

[Guest Lonnie Tomlin]

I was asked how do you do an MEA for a TSA participant who also is covered by a cash balance plan? Since this is our first time with this combination, I haven't thought about it. I assume you would use the accrued benefit value of the annuity that the current lump sum value could be converted to. Anyone have some thoughts on this and/or references for support. THANKS!!

[Guest PeterGulia]

Lonnie, it was good to see you in Washington the past three days at the ALI-ABA annual conference on Retirement Plans of Tax-exempt and Government Employers.

The Treasury Regulations give you some flexibility here.

One way is to express the pension plan's benefit as the life (or joint and survivor) annuity that the relevant notional account would "purchase" at normal retirement age. Then, use the prescribed Table I and Table II factors given by the Regulation.

The other method, since this element of the exclusion allowance seeks to estimate the HYPOTHETICAL contribution that the employer made to "fund" the defined benefit, is to treat the cash balance plan as though it were a defined contribution plan and then treat the "contribution credit" or "pay credit" portion (but not the "interest credit" portion) of the plan's notional credits as though it were a contribution. Under the Treasury Regulation, this might be defended as a reasonable method consistent with the plan's actuarial methods.

Since the employer is responsible for its employee's exclusion allowance, the better practice is to get the employer's written instruction on which method it prefers.

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[Carol V. Calhoun]

One more note here: the exclusion allowance calculation is always complicated where there is a defined benefit plan of any kind, much less a cash balance plan. The Taxpayer Refund and Relief Act of 1999, H.R. 2488, would have solved this problem by eliminating the exclusion allowance for years beginning in 2001, and by allowing the exclusion allowance to be calculated without reference to defined benefit (including cash balance) plan contributions for the year 2000. Click here for summary of the bill and links to the bill text and the Conference Committee explanation. I'm hoping that after a suitable period of wrangling between Congress and the President, something like this will eventually pass.

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