Cash Balance Plans

[Gary]

I am in the process of preparing a cash balance plan proposal to be implemented for 2009.

The plan will include many doctors who will want to have large credits to the plan.

For a first year is it feasible (if the accrued benefit is equal to the account balance) for the first year contribution requirement to be equal to the cash balance credit? I am planning on not having the account receive interest credit until year 2.

Under pre PPA I believe it was possible if the actuarial interest assumption was set equal to the interest rate credit.

I need to get this assignment done in a couple of days, thus the reason why I cannot do all the research on my own in this short a period and must work with Benefits link.

Thank you.

[JAY21]

I don't see how the first year contribution can equal the cash-balance pay credit in 2009 (post PPA). I tihnk your segment rates for funding will give you a difference present value of accrued benefits than your pay credit. I agree, this was more possible pre-PPA, but can't see it happening myself post PPA.

[Gary]

I was thinking if the plan defines the accrued benefit as the account balance then the present value of the accrued benefit would be the account balance (i.e. first year contribution) under the unit credit funding method.

Just a thought.

Or perhaps a minimum funding can be derived that if the interest credit rate (say 1 year t bill) is less than the minimum funding segment rates, then the minimum funding is less than the cash balance credit, but the cash balance credit is less than 150% funding target, thus enabling a contribution equal to the cash balance credit in the first year.

Any of the above fly?

Of course this is prior to taking a crash course on PPA minimum funding.

Thanks.

[Mike Preston]

There are two schools of thought on this. First, if technical corrections passes you will find that the 150% rule will enable a contribution which is precisely the Cash Balance pay credit. Second, if you can show that the at risk liability equals at least the pay credit, you will find that, again, the minimum is less than the pay credit, while the maximum exceeds it.

[ak2ary]

Mike..isn't the at-risk liability usually exactly the sum of the account balances (unless the plan still has whipsaw )?

[Gary]

My understanding is that the technical corrections you refer to, will enable a 150% funding target to be based on essentially the end of year amount (or at least allow a beginning of first year funding target)?

Thanks.

[ak2ary]

It will add 50% of the target normal cost to the funding cushion

[Gary]

I understand what you are saying ak2ary.

Adding 50% to the target normal cost solves the issue.

I guess for a first year if they let the plan calculate the funding target at beginning of year (inclusive of first year accrual or assuming accrual at beginning of year), then 150% of such funding target would accomplish what is needed for that first year, since the 150% of target normal cost may not be as crucial after the first year of funding due to past accrual leverage.

Thanks.

[Gary]

Just to b ack up again for a second.

Let's say the accrued benefit is defined as the hypothetical account balance.

The target normal cost is the present value of the current year accrual.

I don't see why the present value value of the current year accrual cannot simply equal the contribution credit.

Or to put another way (and forgive me if this is in the measurement of assets and liabilities proposed regulation) is it explicitly said that for a cash balance plan the credit must be projected forward to normal retirement age at the interest credit rates and then discounted at the segment funding interest rates?

[ak2ary]

The definition of target normal cost and funding target require the projection to the assumed retirement age using a reasonable assumption as to future interest credit rates and then a discount back to valuation date using yield curve.

Unless you want to assume everybody will retire at the end of the year (likely an unreasonable assumption for most plans), you are stuck....

[Gary]

Sounds good.

This must be stated in the proposed hybrid plans regulations or the proposed minimum funding related regulations.

I will look into it.

Thanks.

[Gary]

So for example let's say the cash balance credit is 50k per year.

The plan interest credit is the 10-year TCM.

If the plan is invested in conservative investments that can consistently meet or exceed the interest credit rate, it would seem that the range set by the minimum target normal cost (projected with likely lower interest credit rates than the segment rates used for discounting) and the 150% funding target should or could potentially, consistently accomodate a funding contribution equal to the cash balance credit. Of course we need that technical corrections to add 50% of the target normal cost to help things more.

Does that logic make sense?

Thanks.

[ak2ary]

other than the first year

In the first year your funding target = target NC will be less than the pay credit, so you need to rely on unfunded at-risk liability + unfunded at risk NC for your deductions. which works as long as the plan offers immediate lump sums. Otherwise the payment of the pay credit to the plan would exceed the deduction limit and generate excise taxes and other silliness.

[Gary]

Yes, I will expect the plan to provide immediate lump sums.

Thank you.

[Mike Preston]

Mike..isn't the at-risk liability usually exactly the sum of the account balances (unless the plan still has whipsaw )?

Indeed. Without whipsaw it will equal. With, it will exceed. I think.

[ak2ary]

I think, for at-risk, the assumption, since everyone is at earliest retirement age, is that everyone will retire on the last day of the plan year with a lump sum. The lump sum is equal to the pay credit, so the at risk target normal cost is equal to the pay credit...and in the first year thats the deduction...I don't see funding whipsaw applying.

[Mike Preston]

By definition, if the whipsaw applies, the lump sum payable is greater than the pay credit. Round and round we go.

[ak2ary]

AHHHHHHHHHH

I can see. I can see!

Thought you meant funding whipsaw, but now I see you meant actual lump sum whipsaw.

Thus as to my last comment ....I believe it was Gilda Radnor as Emily Litella who said ...

"Nevermind"