CB Conversion Transition Benefit

[Guest DORIGHT]

We converted a DB to CB (1999) and provided a transition benefit for those over 45 and 10 years service. The transition was to offset formula differences for those people close to early retirement, which under the old plan started at age 55. At age 55, the transition is credited to their account balance.

1. Is this transition benefit considered a protected retirement subsidy since it would continue after age 65 in an annuity?

2. Can this transition benefit be contingent upon being an employed participant at attainment of age 55?

3. If the transition can be made dependent upon being employed at attainment of age 55 and the participant leaves employment as part of partial termination at age 52 and is eligible to return to the plan if rehired for 5 years, and does not take distribution until after 55, would we be required to provide the transition benefit even if he is not rehired?

We only have a few people in this position but we want to do it correctly. It seems there have have been rulings close but not specific to addressing this issue.

Added 2/15/2008 Maybe in light of the 2008-7 Revenue Ruling we should be revisiting the transition benefit as not being allowed due to backloading violation by having it accrued all at age 55, rather than each year up to age 55 when it would fully accrue. AS it now stands, age 55 employees see an increase in benefit exceeding 50% of their account value. We are awaiting a determination letter on the plan as of the hold for several years.

[Guest DORIGHT]

BTT

[Peanut Butter Man]

What does BTT mean?

[Guest Harry O]

1. Based on the info in your post, this just looks like part of your normal benefit formula. For example, your cash balance formula could be 5% of pay until 55 and 6% of pay after age 55. Assuming the formula isn't backloaded (unlikely in a CB plan), you should be o.k. I wouldn't think this is a protected benefit since it is just part of the normal retirement benefit formula.

2. I would think so.

3. Unless the plan is poorly drafted, no.

Not sure I follow your dates. You say the CB plan started in 1999 but that something was added in 2008???

Yes, you should review the recent IRS guidance in this area, especially the proposed regs issued back in December.

[Guest DORIGHT]

BTT = Bump to top

The cash balance plan existed from the early 90's. On Jan 1, 1999 it merged in a plan from an acquired business with traditional formula. For those being merged and converted to the cash balance formula with 5 years of service and over age 45 on 1/1/99, a transition benefit would be calculated at the time of retirement after age 55. The transition calculation would determine the annuity from the cash balance account at 65 NRA and then reduce that by .25% per month or 3% per year from age 62 back to thier current age. It would then be converted back into a lump sum. It provides for a significant early retirement increase when retiring after age 55. The plan language limits the transition benefits to those who have not left the company by syaing "If you leave the company, you will not be eligible for the transition benefit". We later modified this to say 'You must be employed by the company at age 55.'

The merged or converted plan had an early retirement benefit of reducing the age 65 annuity benefit 6% per year after age 55 for any vested participant and if employed and retiring only 3% per year.

The CB formuala adds a variable percentage each year up to SS Base and 8% over SS base.

The 2008 was just an addition/edit to the earlier post.

So my understanding is now that the early retirement transition benefit is not a protected benefit that you can grow into if not employed at age 55, even if you left the company in a partial termination and reached age 55 prior to achieving five consecutive one year breaks in service. The former employee would have to return to work for the company for one hour (our plan requirement) to be in the plan again as an active participant and the could retire and recieve the transition benefit.

Do you agree?