Too clever by half: unusually low normal retirement age for cash balance plans

[Guest erisafried]

I have fielded an inquiry from a client about a potential modification of its cash balance plan, and I am pretty sure that I have heard some IRS officials (Jim Holland maybe?) expressing some displeasure about the technique at issue. I haven't been able to find anything concrete on the topic though, and I am hoping that someone out there can help to refresh my recollection before I pull all of my hair out.

I believe the idea is this: Company maintains a DC plan and a cash balance plan. Company socks away as much as possible under the cash balance plan, a plan that incidentally has an unusually low normal retirement age (say age 40). Once participants hit the "NRA," they can receive a distribution -- even though they are still working -- and roll it over into the DC plan. I think that PWC and Bank of America have gotten sued over plan designs that used this approach (among others). I probably don't have all of the particulars correct here, but the key feature of the approach seems to be an abnormally low NRA.

Has anyone heard IRS officials questioning this type of approach? Even if every other aspect of the plans was squeaky clean, this still seems like it is just a little bit too "cute" for the IRS to countenance.

[Guest merlin]

Last year at the Mid Atlantic Benefits Conference Jim Holland was on the panel with Tom Finnegan when Finnegan presented this approach. As I recall, Holland had no comment pro or con on the technique.

This year at the same session, Holland offered the opinion that he thought the low NRA approach would have problems with the phased retirement rules. FWIW, I thought that Finnegan was much more positive about the technique last year. This year he was much more cautionary.

[KJohnson]

I didn't go this year, but I did go last year and I remember negative comments from Holland last year. As, I recall that the concern was not only taking "in-service" distributions from a pension plan but its use as a method of avoiding the whipsaw. The "method" I remember being mentioned was to put NRA at the earlier of 65 or five years of service.

[KJohnson]

I just went back and looked at the handout of the powerpoint slides. In the margin I have written: Holland: NRA must be tied to the age when individuals customarily retire. I also have written--that there are issues regarding suspension of benefits/or post NRA actuarial adjustments.

[Everett Moreland]

Proposed Treasury Regulation Section 1.401(a)-1(b)(1)(i): "[N]ormal retirement age cannot be set so low as to be a subterfuge to avoid the requirements of section 401(a), and, accordingly, normal retirement age cannot be earlier than the earliest age that is reasonably representative of a typical retirement age for the covered workforce."

[AndyH]

Everett, would you educate us on what weight such a proposed regulation has?

[Everett Moreland]

AndyH:

I don't know. My impression is no weight. I think the question is whether the proposed regulation accurately states existing law. Some years ago I looked at this and convinced myself that, at least for a DC plan, the informal IRS position was that NRA could be unreasonably low. Either my assessment was wrong or IRS personnel now have a different view.

[david rigby]

The weight changes when (IMHO, not if) it changes from "proposed" to "final".

[AndyH]

Well, I wonder how old it is and whether such things have expiration dates.

Other than the old proposed 401(a)(9) regs I suppose, which looked like they'd be eternal.

And, yes, I know it is controversial , but a few years ago I heard Holland say that the IRS reserves the right to interpret NRD as something other than what the document states.

[GBurns]

I find it amusing that the "weight" of the Proposed Treasury Regs is being questioned in this case, yet almost everyone accepts the Proposed Treasury Regs related to section 125 cafeteria plans which carry the additional burden of having been "discredited" by so many courts.

Also almost everyone has been accepting as law the Notices that the IRS has been issuing regarding HRAs, HSAs etc. Notices have even less weight than Proposed Regs don't they?

[mbozek]

Proposed regs are not enforceable under the tax law and cannot be use against a taxpayer because they are not law until adopted as final regs under the APA, 60 days after publication in the federal register. While the IRS can issue rulings based on proposed regs to taxpayers it cannot apply prposed regs to enforce the tax law.

The proposed regs under 125 (some of which are 25 yers old and inconsistent with current law) arent enforeceable by the IRS against taxpayers.

[JAY21]

Do they carry more weight ? I always took notices and such to be intepretive guidance on existing finalalized code and reg issues (i.e,. minor issues usually not breaking any new ground, at least in theory). Seems too that not all proposed regs are created equal like the new 415 regs which state you "cannot" rely upon them in proposed form. When you can't even rely upon a propose reg, but you can on other IRS notices, it doesn't sound very strong to me, yet I certainly agree that on some proposed regs we hung our hat on them for years (e.g., 401(a)(9). Perhaps we can't blanket categorize "proposed regs" as they seem to have different acceptance levels and approved reliance levels.

[Alf]

Compared with informal oral comments at benefit conferences, I thought that the quote from the proposed regulations was relevant to the posted question and very helpful.

[AndyH]

Did someone say it was unhelpful or irrelevant?

[ak2ary]

The Service will often allow compliance with proposed regulations as a safe harbor until final regulations are issued. This was not the case with the phased retirement rules. The early Normal Retirement age is still valid and is used by a large number of Fortune 500 Companies in their Cash Balance plans to avoid whipsaw and testing problems.

My understanding is that Finnegan still uses this design technique and his only caution is that it will not be around long. To support this, Carol Gold has said publicly that the early NRA is one part of the phased retirement proposed regs thaat the IRS will not back off

[ak2ary]

To clarify, the proposed regulation quoted above is part of the proposed phased retirement regulations issued a few months ago

[KJohnson]

Apparently this is the "hot" issue in the BoA case.

8/16/2005: Bank of America Suit Attacks Retirement Date Issue for Cash Balance Plan First (PLANSPONSOR.com: one-time registration required)

Excerpt: "A motion filed in the lawsuit concerning Bank of America's (BoA) Cash Balance Plan asks the judge to rule on the legality of the retirement age used in the plan, saying it is the 'single-most important question' in the case

http://www.plansponsor.com/pi_type10/?RECORD_ID=30453

[Belgarath]

"Proposed regs are not enforceable under the tax law and cannot be use against a taxpayer because they are not law until adopted as final regs under the APA, 60 days after publication in the federal register. While the IRS can issue rulings based on proposed regs to taxpayers it cannot apply prposed regs to enforce the tax law."

This is good!

Now here's my followup question: Let's say the proposed regs say that as of (X) date - let's say 90 days after the proposed regs are issued - that plan sponsors can no longer double park their cars in IRS parking slots. Can the final regs that are issued 2 years later be made retroactive (and enforceable) to the originally proposed date, or can they only be applied and enforceable starting 60 days after the date of publication in the federal register?

[No Name]

I have a plan that's using high three-year average compensation as an Employee to base benefits. Proposed Regs say to use comp as a Participant. Called my actuary with concerns about how this may change funding, etc.

"Proposed Regulations? Never read them! Any other questions?"

As long as he signs a B....