Cash Balance Option

[Guest ooota]

We recently added a cash benefit contribution account to our pension plan. In addition to its own terms, the contribution account is also governed by the terms of the pension plan. The pension plan provides for an involuntary cash out of accrued benefits that are $5,000 or less. If an individual has an overall accrued benefit of $7,500, but $1,200 of that amount is in the contribution account, can the trustees involuntarily distribution the $1,200 to the individual?

Does the individual have to been given a benefit election form, either for the pension plan or cash balance plan, if he is the receipient of an involuntary distribution or can the plan simply cut him a check?

Thank you in advance for your help.

[Blinky the 3-eyed Fish]

No comprende. What is this cash benefit option you speak of? Is it employee money or employer? If it's the latter, this is within a traditional DB plan?

[SoCalActuary]

From the original information given, I believe you state that the total plan

benefit is $7,500, of which $1,200 is a "cash benefit". The total in the plan

would then exceed $5,000, assuming that the $7,500 is a present value, not

a periodic benefit at retirement age.

The $5,000 rule applies to the total present value of vested accrued benefits.

Do you know that amount?

If it exceeds $5,000, then cashout is not automatic. Both employee and plan sponsor consent are needed.

Before I can help any further, can you clear up what the "cash benefit" means?

Is this a contributory plan, as with many governmental plans? Or does it represent a transfer of a DC plan account? Is it attributed to an employee rollover from another retirement plan or IRA?

Perhaps you are talking about a benefit under a "cash balance" plan formula.

Can you also explain what is meant by the $7,500? Is this an annual benefit at

retirement, or a monthly benefit? Does it represent a present value of benefits?

[Guest ooota]

Yes, it is a benefit under a "cash balance" plan formula and it exists within a traditional DB plan. The $7,500 represents the participant's present value of benefits (cash balance ($1,200) + DB plan ($6,300)).

Does this help? Can the administrator involuntarily cash out (i.e., without consent) the participant from the cash balance plan despite the fact that the overall balance amounts to $7,500?

[Effen]

NO. If it is one plan, with two components, they need to be combined.

Also, a cash balance plan IS a defined benefit plan. The term "cash balance" defines the method used to accrue benefits. Participants in a cash balance plan earn benefits similar to a defined contribution plan, but it is still a defined benefit plan. The employer still bears the investment risk.

[Blinky the 3-eyed Fish]

I agree. Although I have never seen such an arrangement where there are traditional DB benefits plus cash balance benefits under 1 plan. Odd indeed from my perspective.

[MGB]

Blinky, in large plan conversions in recent years, this approach is as common (or more common) than any other approach.

[Effen]

I agree w/ MGB. In the "real" cash balance arena, this is the typical way to handle conversions. This may or may not be true in the "tax shelter" cash balance world. I would expect that most of tax shelter plans aren't conversions, but are new plans