Cash Balance Conversion

[nancy]

I have a defined benefit plan that does not currently pay lump sums. If I convert to a cash balance and convert the current accrued benefits at actuarial equivalence, do all 417(e) issues go away? What happens if I later add a lump sum option?

[Effen]

Since no one else has responded I will give this a shot, unless something was changed in PPA 06 (which is possible since I haven't fully digested the cash balance provisions), in a traditional db conversion 411(d)(6) requires you to protect the accrued benefit and all of its forms of payments, including 417(e) requirements. Therefore, you can't just convert it to a cash balance account and forget about it. This was the heart of the moratorium the IRS put on cash balance conversions and led to lots of problems.

My suggestion would be to simply start the cash balance at $0. Value the plan as two pieces, one for the frozen traditional plan and one for the cash balance piece. Don’t try to combine the two or you are just begging for 411(d)(6) issues.

[Andy the Actuary]

You would also have to assure that the addition of a lump sum feature does not discriminate in favor of HCEs in accordance with IRS Reg. 1.401(a)(4)-5.

[tymesup]

Once you convert to a cash balance, the participants will expect to receive lump sums. Add it now, be a heroine. Add it later, look like you were trying to pull a fast one.