Cash Balance Plans

[Gary]

My understanding is that PPA now allows a cash balance plan to define the accrued benefit and present value of the accrued benefit to be the hypothetical account balance.

Of course the account balance is converted to an act equiv. QJSA as normal form of payment.

And of course the balance cannot exceed the 415 lump sum limits and likewise the annuity cannot exceed the 415 limits.

Finally when computing current liability.

Does it make sense to again use CL as being the account balance or is the suggested practice to determine the act equiv life annuity and then use CL assumptions to calculate the CL?

Thanks.

[JAY21]

I don't have a cite that I can point to but I've just assumed that since the account balances get converted to annuity benefits for funding method purposes that the CL would then continue to also use the same annuity benefits (present valued using the relevant CL interest rates).

[Gary]

Your point is well taken, but alternatively, if the accrued benefit and pvab can be the account balance then under the unit credit funding method the cash balance credit for the first plan year for example, would be the normal cost, where there would be no accrued liability for a new plan. As opposed to converting the first year credit to an annuity and taking the pvab as the normal cost for the first year.

Of course by the second year the difference between plan assets and the hypothetical account balances (aka accrued liability under unit credit) could be the actuarial gain or loss.

I realize that method of converting the account bal to an annuity and taking the pvab can be used for unit credit and current liability too.

In any event I have taken the approach that CL is the pv of the converted annuity under CL assumptions.

I'm not too keen on computing projected benefits under cash balance plans, though mathematically feasible.

Thanks.

[Mike Preston]

Your approach is the only right one.

[JAY21]

I do see your point now. PPA 06 to me really credited the first true hybrid plan with the elimination of the 417(e) floor. I realize the formulas for CB already used DC formula structures (including a safe-harbor DC structure), but to me it was still prmarily just an upsidedown DB plan, but now it seems more like a 75%-25% DB-DC hybrid plan (pick your percentages).

Practically speaking I'm doubtful the canned software vak systems will change their approach post PPA 06 for the CB funding to the approach you mentioned (absent any IRS guidance), but if you write your own program I can see you having those decisions and questions in this post PPA 06 CB world.

[AndyH]

If I may hijack this for a minute...Similar question.....

Mike, maybe this is for you, but when testing a CB plan under the DB/DC general test combo rules, are we in agreement that for gateway purposes the CB allocation is first converted to an annuity using plan rates (perhaps 5.5%), then the annuity is valued at testing assumptions which might be 8.5% and UP84? This might, for example, make a $100,000 CB allocation be equivalent to a DC contribution of $55,000 for purposes of determining the minimum gateway.

This seems to be what people are doing. Is it correct?

[Mike Preston]

Yes.

[AndyH]

Thank you.