Cash Balance 401(a)

[Guest elang]

When applying the 401(a) & 410(b) test to a Hybrid 401K/Cash Balance Plan do you; 1) include the Hypothetical Cash Balance Allocation in the total allocation/contribution as a basis for determining the Benefits as a % of Comp for the purpose of establishing rate groups?; and 2) Do you include the same Hypothetical Cash Balance Allocation in the calculations for the Average Benefits Test?

[AndyH]

1. No*

2. No

Generally, you project the allocation to testing age, convert that to an annuity, and use that annuity for testing purposes for both rate group and average benefits testing.

* In the 1.401(a)(4)-8 regulation, however, there is "Modified general test" which allows you to test the allocations as if they were DC allocations under certain conditions. As far as I can tell this option is still valid - anybody disagree?

[Guest elang]

Thanks. Do you have an Annuity Table that I can use?

[AndyH]

This is more involved than you seem to think.

You need to project the allocation forward to testing age using the interest crediting rate under the plan, convert that to a benefit using the actuarial equivalence factors specified in the plan document. These are plan specific. Then for rate group testing you also need to compute the most valuable accrual rate which is normally the QJSA benefit under the plan, then do a couple of conversions to compute the most valuable accrual rate using the testing assumptions. You need to be fluent in these calcs to understand the MVAR part. This is not as simple as finding a table.

[Guest elang]

Thanks Andy.

It certainly is more involved than I anticipated. We provide the admin for Cross-Tested DC plans and I have quite a few clients who want to add a Cash Balance. We have been working w/ a local actuary on a few cash balance plans that we have added; and in order to project what others would look like. For the projections I would like to be able provide a reasonably accurate preliminary projection myself. Do you know of any available resources that would allow for this? Thanks for all of your help.

[AndyH]

If there were an easy to use, stand alone proposal program for DB/PS plans out there I would be a customer. Maybe someone out there knows of one.

To me it needs to look at a(4) testing, 401(a)(26), gateway, 415, top heavy, minimum funding with segment rates, treasury to bond rate transition, average benefits testing with dc components, 404 etc. I developed my own but would prefer to use a vendor's because the calculations are getting more and more complex.