Cash Balance Plans - Whipsaw

[Gary]

Say a cash balance plan does not meet the safe harbor standards that entitles the plan to pay the lump sum as the account balance, thus the lump sum must be at least as great as the present value of the accrued benefit.

SO for eg. the situation results in a whipsaw based on projecting the account at 7.5% and a 417(e) rate of 5.5%.

The plan provides payment of the account balance upon pre-ret death to the beneficiary.

Does the present value of the accrued benefit have to take into account pre-retirement mortality when discounting the NRA lump sum to current age or should it just be discounted using interest only? We'll assume that the plan is silent on this present value calculation matter.

Thanks and look forward to various other views and interpretations.

[Guest flogger]

Without considering all the cash balance issues: a PVAB considers pre-retirement mortality only to the extent that a death benefit is not provided. If you have a pre-ret death benefit equal to or greater than the PVAB, then no pre-ret mortality is used because there is no sacrifice of benefit in the event of death.

I'm unclear on how these CB issues effect what discount rates to use.

[SoCalActuary]

You should be so lucky to use 5.5% today.

Seriously, the 417(e) rates are currently much lower than 5.5%, but that can change monthly.

The 5.5% interest rate for 415 limit lump sums may also apply if the benefit is high enough.

If this were my client, I would seriously discuss an amendment to the interest rates that minimizes or eliminates the whipsaw.