Cash Balance / DC combo design

[SteveH]

If all employees are covered by both plans, what minimum benefit must be provided by the Cash Balance plan?

I have heard if you are doing a percentage of pay, then 3% is considered a meaningful benefit.

I have heard that if you are doing a flat dollar, then $1,000 is a menaningful benefit.

I have seen cash balance proposals that are allocating only a 2% of pay contribution to the rank and file employees with a 3.5% allocation to a profit sharing plan. (by the way I beleive this proposal didn't pass the gateway test)

I have been told there is an actuarial firm in California that will design a $100 flat cash balance benefit with the remaining required contributions coming in the form of profit sharing allocations.

I am concerned about 401(a)(26).

In the plan I am desgining, the owner is receiving a large enough allocation that I need to give at least 7.5% to the employees for the gateway, but i would rather give the majority in the form of profit sharing contributions to eliminate as much of the hypothetical interest credits as possible.

[ak2ary]

The IRS is generally requiring an annual accrual of 1/2% of pay

The so-called Paul Schultz memo requies that in order for an accrual to be meaningful under 401(a)(26), it must be at least .5% of pay , payable as a life annuity at NRA. In a cash balance plan, you would project the pay credit to NRA using the plan's interest credit rate. Convert the NRA to an annuity using te plan's definition of actuarial equivalence and express the annuity as a percentage of pay. If that % is greater than .5% its meaningful...if not ...it's not

There is no safe harbor pay credit and the amount needed depends on your demographics, the plan's NRA, the plan's interest credit rate and the plan's definition of acvtuarial equivalence. The fact that the DB plan is aggregated with a PSP does not affect the requirement that the db meet 401(a)(26) alone

[Penman2006]

So, as mentioned, the 1/2% benefit accrual is currently considered the benchmark for what is a meaningful benefit. In a cash balance plan the cash balance % of pay contribution must be converted to an annuity basis and then compared with the .5% meaningful accrual benchmark. Depending on the participants age, something like 2% or 3% of pay cash balance contribution may be enough but you have to do the conversion and check. Then, per 401(a)(26), in general, the lesser of 50 employees or 40% of the employees that would otherwise be eligible under 410(b) regardless of non-statutory exclusions, must be getting a meaningful benefit. For 401(a)(26), it's okay if some participants get less than .5% as long as enough of them do to pass the 401(a)(26) test.