Frozen CB Plan

[David]

Would a frozen cash balance plan have a normal cost attributable to the interest credit?

[ak2ary]

It could if the interest credit rate exceeded the funding rate

[AndyH]

Would you mind elaborating, Tom?

Is there a valid argument that such a plan is technically not frozen for 410(b)/401(a)(26)/401(a)(4) purposes?

[SoCalActuary]

While I understand the math behind Tom's comment, I would prefer that the interest credit be treated as an actuarial loss.

This comment assumes that the interest credit is based on one of the pre-approved (IRS-blessed) market rates of return.

[AndyH]

I was speculating "what if" the employer decided he liked his plan frozen except he wanted to credit an arbitrary 8% per year for example.

David's question could stem from either type of situation.

[ak2ary]

I think we need more guidance on Target Normal Cost before we can answer this question for sure. I would also like the answer to be that it is an actuarial loss

I think that Andy's question is the more interesting question. In a "frozen" cash balance plan with a variable interest credit, the participants benefit payable as a life annuity at testing age changes every year. The participant's benefit payable in qjsa form at NRA changes every year. Is this a frozen plan for (a)(4)/410(b)/(a)(26)??

[SoCalActuary]

Generally, I would say that the interest credits are not a reward for additional service, so no benefit is earned once the contribution credit stops.

I would change my position if the interest credit exceeds a reasonable "market rate" value. But a market rate that might include an equity component would not cause me to view the plan as unfrozen.

[ak2ary]

B-

I really hope that is the answer, but have recently spent a fair amount of time looking at variable annuity plans (VAPs) and am growing convinced that the IRS may not come down there, in all cases. I think your limitation to a market rate is a good one, but it would have to come via regulation and I think we are years away from that.

A common design in VAPs (plans that are indexed to the actual return on plan assets) is that for determination of your accrued benefit, the plan does not make a reasonable assumption as to the future rate of return on plan assets, but rather the plan terms call for an assumption such that all future plan returns are assumed to be equal to the GATT or PPA rate, regardless of the asset makeup of the plan. The proposed hybrid regs made the satement that the actual return on plan assets is a market rate of return and clearly the third (usually highest) segment rate is a market rate of return. So, either way the plans provide no greater than a market rate. These plans commonly provide that if you take your money future returns are at the PPA rate, but if you leave it in, future returns are at the actual rate earned by the plan. Thus, if you leave your money in the plan you are expested to receive a greater benefit than ifd you take it out.

While I agree that has nothing to do with additional service but rather with delayed commencement, it seems to me that, in this particular case, its a benefit accrual for both active and former employees.

{The other arguement is, as noted in the proposed reg, that all future VA adjustments to the benefit are acrued at the time the benefit is accrued. But this would invalidate the plan provision that changes the future rate of return assumption for determining the accrued benefit, and many of the plans have favorable DLs (that they shouldn't have for about a thousand reasons)}

[Guest Mike Melnick]

Note that ff the cash balance plan pays a different interest rate for active employees than it does for former employees with vested balances, it is reasonable to treat the "extra" interest credit as something earned on account of service, and therefore include it in the normal cost. Of course, that does raise the question of whether such a plan is truly "frozen".

Note that the backloading rules limit the extent that the active and inactive interest rates can vary, especially if there are zero contributions credits.