Cash Balance Funding Whipsaw

[JAY21]

I believe we have no Cash-Balance safe-harbor fixed interest rates to my knowledge. I know I can use the 3rd segment rate as a safe-harbor per proposed regs which under transitional rates (this plan went in for 2007 so eligible for transitional rates) the 3rd segment rate is 6.23%.

We're thinking of amending the interest credit rate up; currently using a 10 year treasury bond rate of just above 4%.

How aggressive do you think it is to go with a fixed rate of 6% for 2008 (via amendment) ?

It's lower than 3rd segment rate, higher than various Treasury Bond index rates, but ultimately not a safe-harbor rate at this point.

FWIW, there are only HCEs in this plan. Main goal is higher interest credit for accrued benefits and softer funding whipsaw impact on minimum required contribution.

[AndyH]

I wish you got some answers to these questions; I'd like to know what to do as well. People are petrified of linking benefits to a variable bond rate with no cap, in this economy. Anything below the effective rate produces an underfunded plan (without the life raft, err cushion in the first year that is).

The exotic 3 year cash balance "bailout" approaches suggested at conferences aren't for everybody.

[quinnfield]

in the interest of simplicity, I would stick with the old 96-8 safe harbor rates for 2009. This would result in an interest rate of 4.00% using 30-year TCM and a 2-month lookback.

Notice 96-8 states:

Under a frontloaded interest credit plan [e.g., a typical cash balance plan] that, for this purpose, specifies a variable index equal to the PBGC immediate rate or the sum of one of the standard indices and a margin not greater than the specified margin associated with that standard index, no impermissible forfeiture would result from projecting that the rate used to determine future interest credits for an employee is no greater than the applicable interest rate under section 417(e)(3), as amended by RPA '94. Thus, if such a plan has been amended to comply with the changes to section 417(e) made by RPA '94, the employee's entire accrued benefit could be distributed in the form of a single sum distribution equal to the employee's hypothetical account balance without violating section 411(a) or 417(e), provided that the plan provides the appropriate annuity conversion factors.

Standard Index Associated Margin

The discount rate on 3-month Treasury Bills 175 basis points

The discount rate on 6-month Treasury Bills or 12- month Treasury Bills 150 basis points

The yield on 1-year Treasury Constant Maturities 100 basis points

The yield on 2-year Treasury Constant Maturities or 3-year Treasury Constant Maturities 50 basis points

The yield on 5-year Treasury Constant Maturities or 7-year Treasury Constant Maturities 25 basis points

The yield on 10-year Treasury Constant Maturities or any longer period Treasury Constant Maturities 0 basis points

Annual rate of change of the Consumer Price Index 3 percentage points

[JAY21]

That may not be a bad way to go but since PPA 06 no longer requires 417(e) to be applied to cash-balance accounts (i.e,. can pay out on theoretical account balance) I'm not sure that cite is as relevant as it used to be though no doubt still safe.

[Blinky the 3-eyed Fish]

Read the CB proposed regs. Using the safe harbor rates in 96-8 is an appropriate options, amongst others. Using a fixed 6% return would be very unadvisable at this stage.