Cash Balance Plan

[Medusa]

We are taking over a cash balance plan where the benefits do not satisfy the Paul Shultz meaningful benefit standard for 401(a)(26). Has anyone had any success arguing with the IRS that benefits which do not meet this standard are still meaningful for purposes of 401(a)(26)? Any experience you can relate would be helpful.

Medusa

[Effen]

Has the IRS raised the issue or are you just trying to prepare if they do?

Does the plan have a determination letter?

[SoCalActuary]

We are taking over a cash balance plan where the benefits do not satisfy the Paul Shultz meaningful benefit standard for 401(a)(26). Has anyone had any success arguing with the IRS that benefits which do not meet this standard are still meaningful for purposes of 401(a)(26)? Any experience you can relate would be helpful.

Medusa

The details of your plan are important. What interest rates are used to test this? Did the plan change because of lower rates?

What interest rate are you using to project the account balances? Do you have authority to use a higher rate?

[AndyH]

"What interest rate are you using to project the account balances? Do you have authority to use a higher rate?"

That is an interesting comment. Maybe that could be an 11-(g) correction, a "bonus" interest rate.

Good stab at those "market rate" requirees.

[Medusa]

Effen: The prior TPA/actuary did apply for a DL, and it's still under review at the Service. They did not request a ruling specific to 401(a)(26) compliance, although we're going to suggest they amend the application to do so. The actuary seems to think they can make the case that a .5% contribution (rather than benefit) rate can be meaningful.

SoCal: There was no change in the plan or in the interest rate. From what I can tell the interest rates used for testing are just the 7.5%-8.5% corridor. I think the actuary's position that these benefits are meaningful is based on "gut", not on any actual numerical demonstration or testing. Must be nice.

[SoCalActuary]

Your testing assumption is in the 7.5 to 8.5 corridor. Of course, 8.5% is better for making the account look like a bigger amount.

But what interest rate are you using to project the CB benefit to normal retirement?

That answer will determine the monthly benefit at NRD, when combined with your testing APR.

[Medusa]

That would be 5%.

[ak2ary]

At least the remedial amendment period is still running. Most of the plans I have seen run into this failed due to an inordinately early NRA. In those cases, if you amended the NRA to comply with the final phased retirement regs the issue disappeared... but a half percent pay credit is pretty tough. It seems you have two choices...raise your interest credit (which will cost more money in the long run) or take advantage of the remedial amendment period to raise the previous pay credits.

On audit, if the IRS raises the issue, my experience is that they are not flexible on the .5% accrual standard... at all.

[Medusa]

Thank you Ak2ary. We're asking the prior actuary to amend their DL request to include a 401(a)(26) determination so that it can be corrected during the RAP. I'm not sure the client would have taken the plan with the increased accruals that I am pretty sure will be required, so this will likely not be the end of it.