Allocation conditions in Cash Balance Plans

[AndyH]

Some cash balance plans allow allocation provisions such as last day employment requirements. What is the justification for that when a year of service is defined as 1000 hours? Or is there one?

Can a cash balance plan that has a last day employment requirement be amended during a year to freeze benefits (with 15 or 45 day notice) and avoid a contribution if such allocation is conditioned on last day employment?

Help please. These are not hypotheticals.

[Andy the Actuary]

Some cash balance plans allow allocation provisions such as last day employment requirements. What is the justification for that when a year of service is defined as 1000 hours? Or is there one?

Can a cash balance plan that has a last day employment requirement be amended during a year to freeze benefits (with 15 or 45 day notice) and avoid a contribution if such allocation is conditioned on last day employment?

Help please. These are not hypotheticals.

First question: It would seem as long as 410(b) is satisfied. Second question: Since benefit is not accrued until last day of plan year, this would make sense. There may be an issue if the plan is top-heavy.

[Effen]

My understanding was that a cash balance plan cannot have a last day rule. I think this would violate the ratable accrual rules since in essence the benefit isn't accrued until the last minute of the last day of the year...I'm pretty sure this is problem. Benefits need to accrue ratably over the year. All or nothing is ok, as long as it doesn't require more than 1000 hours. I think the "last day rule" could cause you to fail this requirement.

Form CCH:

While a plan may not require more than 1,000 hours of service as a minimum service requirement, it may require more than 1,000 hours of service for a full year of participation. In other words, a year of service --defined as 1,000 hours of service --and a year of participation for the purposes of benefit accrual, need not be the same. To the extent that an employee's service is less than what is required for a full year of participation, the employee, if he or she has received credit for 1,000 hours, must nonetheless be credited with a partial year of participation equivalent to no less than a ratable portion of a full year. For example, a plan which requires 2,000 hours of service for a full year of participation would be permitted to credit service in an accrual computation period according to the following table:

% of full year of

Hours of service credited participation credited

1000.................................... 50

1001 to 1200............................ 60

1201 to 1400............................ 70

1401 to 1600............................ 80

1601 to 1800............................ 90

1801 and above.......................... 100

Each employee credited with not less than 1,000 hours of service under this example is credited with at least a ratable portion of a full year of participation (.45 ).

.45 ERISA Reg. §2530.204-2©.

[Bill Presson]

The only "last day" requirement that I've seen in a cash balance plan is used to be in a specific allocation group. For example if Physician A is employed on the last day he is in Group A. If not, he moves to Group C which receives the required minimums.

[AndyH]

Well, I've seen a bunch of them. And I know it is an option under Corbel's volume submitter.

More opinions please. I don't understand how it would be permissable myself, but it appears to be a common practice ......

[Tom Poje]

of course, being a non-DB person this is only a 'guess'

DOL 2530-200b-1a says something about ...an employee who completes 1000 hours of service ... MUST be credited with at least a partial year of particpation....

DOL 2530-200b-1(b) says that a plan which is NOT a DB plan....may provide that an individual who has been a participant in the plan, but who has separated from service...does not share in the allocation...even though the individiual is credited with 1000 or more hours

so, since a cash balance is a DB plan, I'd say the last day rule is not possible. (once an individual has worked 1000 hours of course.)

[Effen]

If Corbel says it is ok, why don't you ask them for proof.

I recently went though a fairly detailed arguement with another large document provider and finally got them to agree that their late retirement provisions were illegal. I think you know 10X what most IRS document reviewers know. I think the "big boys" just get rubber stamped or they are able to talk the agents into accepting something that isn't really kosher.

I would be interested if you ultimately conclude you can have a last day rule in a cash balance plan.

[AndyH]

I just looked in the cash balance answer book and that says that some cash balance plans require last day employment. It insinuates that such plans are not basing the allocation on a "year of benefit service" but on something else, employment on the last day of the year.

I would concur that a year of benefit service cannot be denied under these circumstances, but that would seem to be a different issue, the argument seems to be. Hmmmmm.

Anybody got the current EOB handy?

[AndyH]

Effen, the last time I cited a Corbel provision, they were quick to deny it represented legal authority, so I don't consider that as proof of anything, just another piece to the puzzle. But certainly we can ask them to comment, it just won't be me and it won't be as soon as I was looking for an answer by.

[Tom Poje]

Maybe it simply works the same as eligibility.

you could say the wait is 300 hours in a 3 month period as long as someone who works 1000 hours in a 12 month also enters.

thus in a cash balance you can have a last day provision, provided anyone who works 1000 hours receives a contribution.

thus, an active person who works 600 hours receives a contribution, but a terminee with 600 hours does not.

hey Andy, couldn't get away the ASPPA conference?

[Effen]

I just looked in the cash balance answer book and that says that some cash balance plans require last day employment.

Did it give any references?

[AndyH]

It "embedded" a reference to 1.401(a)(26) which deals with exclusions for terms < 501 hours and has a reference to last day employment, but I don't see the applicability other than that 401(a)(26) somehow contemplated such a provision for some reason. But at least I am comfortable that I not the only one to have seen these animals.

[John Feldt ERPA CPC QPA]

SunGard (Corbel) has done some cash balance plan seminars where they specifically state that a cash balance plan cannot have a last day requirement for receiving a benefit accrual. Perhaps the provision being used is not completely understood by the document drafter?

[AndyH]

Thanks for all the comments. Now I have an idea how Pandora felt when she opened her box. There must be others out there with takeovers who have cause for concern.

p.s. I just looked at the Cash Balance Answer Book again to make sure i had not misremembered it and it clearly states in more than one place that CB plans can require employment on the last day of the period to get an allocation. And the authors appear to be highly credentialled so I don't know what to make of this.

[Guest merlin]

Andy,

I just put the question to Robert Richter at Corbel, and his answer was the same as J4's. A cash balance plan is a db plan, and therefore can't impose a last day requirement for accrual purposes.

[AndyH]

Andy,

I just put the question to Robert Richter at Corbel, and his answer was the same as J4's. A cash balance plan is a db plan, and therefore can't impose a last day requirement for accrual purposes.

Thanks Merlin. Anybody know the authors of the Cash Balance Answer book personally and can get their opinion(s)?

Daniel P. Schwallie, J.D., Ph.D.

Barbara J. Hogg, F.S.A.

Paul W. Rangecroft, F.S.A., E.A.

[Andy the Actuary]

Andy,

I just put the question to Robert Richter at Corbel, and his answer was the same as J4's. A cash balance plan is a db plan, and therefore can't impose a last day requirement for accrual purposes.

Are you suggeting this is the case even if it is demonstrated with the provision that the plan satisfies 410(b), 401(a)(4), and any other code sections you can think of??? If you say, that is the case, then why so? Not that I'm so arrogant as to discount the opinion of experts, but there should be some official language (code, regs, notices, rev rule) somewhere that says you can't do it.

[AndyH]

TAG has a pretty good analysis that also says it is prohibited. It basically says it nothing allows it. I would not accept any one source, but the opinions are beginning to converge.

[Andy the Actuary]

TAG has a pretty good analysis that also says it is prohibited. It basically says it nothing allows it. I would not accept any one source, but the opinions are beginning to converge.

Yes, while opinions may converge, where are the words? In "Twelve Angry Men," 11 jurors converged on guilty but in the end they acquitted.

[DMcGovern]

Well, I've seen a bunch of them. And I know it is an option under Corbel's volume submitter.

More opinions please. I don't understand how it would be permissable myself, but it appears to be a common practice ......

I don't know if this helps - Corbel's IDP document only allows for a last day requirement if the hypothetical allocation is calculated monthly or quarterly. If the hypothetical allocation is calculated annually, the only options available for allocation requirements are 1,000 hours or no hourly requirement.

[AndyH]

Looking a bit closer with these comments in mind, I do see that Corbel's VS prohibits a last day provision if the measurement period is annual. Thanks for the feedback with that.

Now about those takeover plans ................And the CB answer book. Thanks for all the comments.