Cash Balance as Super Profit Sharing Plan

[carrots]

A cash balance plan is designed with a small benefit formula. If the company sponsor has a good year, the formula is retroactively increased for that year only. Each year the formula is either left at the original low level, or retroactively increased for that year only. The purpose of the design and methodology is to increase the flexibility of employer contributions to reflect the actual level of business activity.

Does this meet IRC regs?

If not, why not?

[D Syrett]

Seems that the more you amend the greater the risk of running afoul of the definitely determinable benefit requirements.

[JAY21]

For what it's worth at the 2008 ASPPA-LA Benefits conference in one of those small "pre-conference" study group sessions with the IRS, Newell Kemlin the IRS west coast top actuary/auditor was asked if a DB plan can amend it's benefit formula every year without any negative repurcussions. He said as long as the amendments were timely (including 412(d)(2) election; fomerly 412©(8) election), he had no problem with an annual amendment.

Don't know if he represents the general IRS thinking, and he's just the west coast area auditor/actuary and it's not in writing, but it was an interesting comment and maybe helpful to those on the west coast that might have some client audits.

[SoCalActuary]

A cash balance plan is designed with a small benefit formula. If the company sponsor has a good year, the formula is retroactively increased for that year only. Each year the formula is either left at the original low level, or retroactively increased for that year only. The purpose of the design and methodology is to increase the flexibility of employer contributions to reflect the actual level of business activity.

Does this meet IRC regs?

If not, why not?

This concept was discussed in December 2005 when Judy Miller was on Finance...The nature of PPA minimum funding rules and the requirement that you cannot amortize the current year accruals leads to this type of risk management. Granted that it is simpler to just use a profit sharing plan, but the cash balance plan has better guarantees for the employees. In addition, CB has much higher contribution opportunities, like the ability to contribute the entire amount of underfunding due to investment losses.