Changing Cash Balance Interest Credit Rate

[Dennis Povloski]

We have come across the case of a cash balance plan that bases it's interest credit off of S&P 500 rates.

The plan does not allow for distributions prior to normal retirement, so generally, the whipsaw effect doesn't affect the plan. However, the clients are interested in terminating the plan, and if that happens whipsaw will have a big effect, and we feel that the plan will be underfunded on a termination basis as a result.

Are there any issues with amending the interest credit rate to match the 417(e) rates? Are future interest credits a protected benefit?

My instinct is no because the 417(e) rate is variable itself, but I wanted to see if anyone has had any experience with this.

Thanks!

[SoCalActuary]

That's what determination letters are for!

Seriously, create the amendment to use 417e interest rates at a future date as a proposed amendment, and submit it for approval, with the proper notice to interested parties about the submission. After approval, which you should get, notify employees of the prospective changes before the effective date of the change.

[Blinky the 3-eyed Fish]

I have concerns about this amendment. At the point in time the amendment becomes effective the participants CB is converted to an AB using the S&P rate. At the next instant the CB is converted using the lower 417(e) rate. The reduction in the AB and subsequent reduction in the lump sum seems like a 411(d)(6) violation to me. To my knowledge the IRS has not backed off the whipsaw issue.

[david rigby]

Blinky's concern seems correct to me. After all, every amendment has (or should have) a statement that it will not reduce any participant's accrued benefit at the later of the effective date or the adoption date.

But perhaps I misunderstand the intent of the amendment.

[Dennis Povloski]

This one is a toughie!

To attack the question from a different angle. What happens when you freeze a cash balance plan. Are the hypothetical accounts frozen, or are they converted to a monthly benefit at retirement, and that is what's frozen?

I guess that would really determine how this could work.

Thanks all for the input!

[mbozek]

Before amending the interest rate used to determine Lump sums you need to review the case law, including the Xerox case in the 7th circuit which held that the interest rate was part of the accrued benefit. There have been discussion of this issue in prior posts.

[SoCalActuary]

Please explain how the S&P 500 rate is applied. Is there an interest rate published at the point of benefit determination? Or does the account value change in the same manner as the composite S&P equity index?

If it is the latter, then there is no published interest rate, and no guaranteed interest rate to whipsaw.

[JDuns]

I know that some take the position that the interest credit is part of the accrued benefit and cannot be frozen or reduced unless the whole plan is terminated.

I know others that argue that the interest credit may be frozen or changed at any time.

I have generally taken the position that a sponsor could provide the greater of (a) today's account balance growing at the current plan rate and (b) today's account balance plus future contributions both growing at a new rate (which could be higher or lower than the old rate).