Cash Balance Plan Accrued Benefit

[Gary]

Pror to PPA my understanding of the way the AB needed to be calculated (for practical purposes) was:

EE is age 50

NRA is 65

If account bal = 50,000 at age 50 it would be projected at the interest credit rate to 65 and then converted to a life annuity

And for example if the interest credit were reduced from say 6% to 4%, the current balance (at the time of change) would need to be projected at 6% to preserve the AB since the AB is based on the balance to NRA, but future allocations could be credited at 4%.

Bottom line is that the AB (annuity payable at NRA) must be preserved (which would likely entail the balance at the time of change being projected at 6%). At a minimum there could be substantial wearaway if the entire balance is projected at 4%.

Post PPA

It seems the above approach is still acceptable.

However, as an alternative the AB can simply be the account balance, where the normal form of payout would be a QJSA.

Are we in agreement on that?

So the following could occur if the acct bal is the AB.

1. No need to project balance to NRA except for informational purposes for providing the projected benefit.

2. The plan can simply determine the benefit payable at the time of ddsitribution, where the payment can be a lump sum equal to the account balance or an equivalent immediate annuity, if the plan provides.

3. If the interest credit were reduced from 6% to 4%, then the balance is simply projected at 4% per year from that point on and thus no need to preserve the 6% interest credit to preserve the AB.

Are we in agreement?

Any other views?

Thanks.

[Effen]

Interesting timing ... I was just looking at these same issues myself. I think we are on the same page, but I'm not sure about the paragraph.

1. No need to project balance to NRA except for informational purposes for providing the projected benefit.

You also need to project for testing purposes if your plan needs to be general tested, so your conversion factors may be important.

2. The plan can simply determine the benefit payable at the time of ddsitribution, where the payment can be a lump sum equal to the account balance or an equivalent immediate annuity, if the plan provides.

Seems correct.

3. If the interest credit were reduced from 6% to 4%, then the balance is simply projected at 4% per year from that point on and thus no need to preserve the 6% interest credit to preserve the AB.

I'm not so sure you don't have a 411(d)(6) issue, although I'm not sure. I'm thinking your actually have 3 interest (and mortality) rates that are important: a) interest crediting rate - market related rate used to accumulate your cash balance account from one year to the next, b) cash balance conversion rate - rate (interest & mortality) used to convert the cash balance account to an annuity either immediate or deferred, c) actuarial equivalent - rate (interest & mortality) used to convert the annuity into other forms of payment, other than lump sum.

I think I agree that the interest crediting rate can be change without a 411(d)(6) violation (assuming you follow procedures in the Regs), but I'm not sure about the conversion rate. For example, if pre-ppa my plan used the 30-yr treasury for all three (crediting, conversion, equivalent) would it be a 411(d)(6) issue if I changed the conversion rate to a flat 5%? Or if my current plan says to use the 417(e) rates for conversion, can I change that to a flat 5%? Granted my lump sum doesn't change, but my monthly annuity will probably be lower using 5% than it would have been using current 417(e) rates, so if I change the basis of my conversion rate and the annuity decreases, would that require a 204(h) Notice?

I guess I am envisioning using 30-yr treasury rates for the crediting rate, 417(e) for conversions (or maybe a flat %), and a flat % for actuarial equivalents.

Any comments from the gallery?

[Gary]

Regarding interest rate I was just focusing on the interest crerditing rate to the account balance.

My thoughts were:

Pre PPA - the balance at the time of reduction in interest credit rate may still need to be projected at the higher rate since the accd ben was computed by projecting balance to NRA

And for actuarial unit credit funding it seemed essential to determine PVAB by projecting at interest credit rate and discounting at valuation rate.

Post PPA - it seems if the AB is the balance then it is no problem to change interest credit rate to a lower rate and just increase the entire balance by the lower rate.

See the difference between what I would understand for pre PPA and what may be allowed post PPA.

And lastly for actuarial funding, it seems if the AB is the account balance then the PVAB could be siimply the account balance; though I believe the official interpretation (not entirely sure) is that you must determine PVAB by projecting balance to NRA using interest credit rate and then discount using the 3 segment rates.

In conlusion the aspects in my reply consist of:

1. AB preservation if interest credit rate reduced.

2. PVAB calculation for funding purposes.

Any offical opinions, references appreciated.

Thanks.

[Effen]

And lastly for actuarial funding, it seems if the AB is the account balance then the PVAB could be siimply the account balance

It depends on what “PVAB” means. Since you referenced funding, I assume you mean "Funding Target", if so, then I definitely disagree with you. The funding target would be based on the accrued benefit (monthly annuity at expected decrement age) times a factor based on the segment rates. If your interest crediting rate is lower than the segment rates, your funding target will probably be lower than the sum of the account balances.

[Gary]

Thanks Effen.

Yes, I would be referring to the PPA funding terms, i.e. funding target, target normal cost.

And you made it clear that PVAB for determining funding requirement must be projected and discounted as you state.

Thanks.

[Gary]

It seems to me that the accrued benefit can be expressed as the account balance and is not required to be the account balance projected to normal retirement age and converted to an annuity.

The projected to NRA stuff seems to be part of the safe harbor under 1.401(a)(4)-8©, but not necessarily a cash balance plan requirement.

411(b)(5)(A)(iv) which falls under the 411(b) accrued benefit rules indicates that "the accrued benefit, may under the terms of the plan, be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the employee's final average compensation."

So the above seems to explicitly say that the accd ben can be the account balance.

However, as far as I can see it would be prudent to provide an interest credit that either meets 96-8 or 1.401(a)(4)-8©(3)(iv)©.

If the AB is the account balance, it can result in several ramifications:

1. The allocation can be used directly for general test non discrimination testing, instead of converting to an annuity and then determining the present value

2. The allocation can be converted to an accrual for ND testing just like an allocation in a DC plan.

3. If the plan amends the interest credit rate to a lower rate, the entire balance can be increased at the new lower rate and not just the future allocations.

Any opinions on the above alleged fact pattern?

I almost go as far to say that for minimum funding purposes the PVAB is the account balance, since if the plan terminated that would be the lump sum due to each participant, if it could be assumed that each participant would elect a lump sum.

However, I don't see a problem with projecting the account balance to NRA (i.e. assumed decrement ages) and then using the segment rate to discount to current age when computing the funding target.

Thanks.

[Effen]

Anyone else want to chime in on this? I'm curious what others are thinking.

[ak2ary]

The IRS is very vocally saying that the accrued benefit can only be expressed as an account balance for purposes of the age discrimination rules under 411(b)(5). You may also pay a lump sum equal to the account balance without violating 411(a) or 417(e). For ALL other purposes, the accrued benefit must be stated as an annuity commencing at NRA. This has a bunch of ramifications

1. 
   --Since the accrued benefit is a benefit at NRA, you cannot reduce future interest credits by an amendment without either going to two separate accounts or doing wear-away calcs
   --For determining the normal accrual rate under 401(a)(4) you must project the current balance (or pay credit) out to NRA using the plan's interest credit rate and convert it to an annuity using the plan's actuarial equivalence basis
   --For purposes of the 411(b) accrual rules, you must test the annuity accruals at NRA
   --Whipsaw still exists for all benefit forms other than lump sum. Consider a plan with a variable interest credit most recently equal to 6% and actuarial equivalence at 5%, the minimum qjsa payable is the actuarial equivalent of the current balance projected to NRA at 6% converted to annuity at NRA then converted to its actuarial equivalent (using 5%) at current age. This will make the relative value of the lump sum considerably lower than that of the immediately commencing qjsa benefit
   

Many many more I am sure but these are the biggest ones off the top of my head

[Gary]

What ak2ary says makes sense based on my current understanding.

And I don't dispute anything in his post.

Regarding the computation of allocations for 401a4 testing:

1. does it necessarily follow that the allocation must be equal to the actuarial present value (using non discrimination testing assumptions) of the increase in accrued benefit (assuming current year annual testing)? Or could the allocation simply be the contribution credit divided by compensation (which appears to be what is required when using the modified general method under 1.401a4-8c3(iii)©)?

2. And if the allocation could be the credit divided by compensation, then could it follow that the allocation method would not be considered cross testing?

I expect that the allocation must be handled the conventional, conservative way, i.e. actuarial PV of increase of AB and thus resulting in the allocation method being deemed as cross testing just like any other DB plan.

*****

Bonus question:

A plan sponsor raised the question: If a cash balance plan wants to use a retiree's account balance (say 100k at retirement) to purchase an annuity then can the plan provide actuarial equivalence re: the retirement benefit payable as an annuity under the plan, equal to the annuity that the account balance can purchase from a designated insurance company?

Or perhaps the greater of the annuity the insurance company would provide and the annuity determined with an interest rate of 0% and some standard mortality table. By doing that "greater of" method provides a minimum definitely determinable benefit and yet always provides the benefit the account balance can obtain from the insurance company as the "greater of" benefit.

I realize I am playing devil's advocate and that the above would likely be shot down due to using an unreasonable assumption for actuarial equivalence under the plan, but just trying to get our creative juices flowing.

Bottom line is, the plan sponsor does not want to pay the "insurance costs" for the purchase of an annuity through an insurance company.