Cash balance funding under PPA

[FAPInJax]

How would the cushion benefit be calculated under a cash balance plan?

I understand the funding for the funding target (the benefit accrued at the beginning of the year - assuming a BOY valuation) and the increase in the benefit is the target normal cost. However, assume the cash balance plan has been in effect for a couple of years and now the owner starts taking a very large compensation. Does this affect the cushion benefit as it is the accrued benefit recognizing compensation increases??

Any help would be appreciated.

[SoCalActuary]

I don't design CB plans to expect the CB account will change based on some unrealized future compensation increase. CB plans just don't look like final average benefit formulas.

So, I would never expect the cushion amount to reflect salary increases on the CB portion of a benefit.

Now, if you have a 2% TH min, or even a 0.5% deminimus formula, where the CB account is lower, then those other benefit formulas would have a projected benefit that gives rise to a cushion amount.

[Guest Sus95]

I am running into this same issue right now. My valuation vendor is projecting benefits to NRD with future salary credits and salary scale, then prorating benefit at NRD by P/P, which is then used for the cushion on a cash balance plan. There is no guidance than I am aware of that allows one to do this on a "career avg" type formula. It is up to interpretation of the code/reg at this point. It seems unreasonable to me that future salary increases in a cash balance plan will increase the FT, which is what the cushion is about.

However, I have posted this same issue on ACOPA and some responses were that some projection of benefits/with proration is reasonable.

[SoCalActuary]

I am running into this same issue right now. My valuation vendor is projecting benefits to NRD with future salary credits and salary scale, then prorating benefit at NRD by P/P, which is then used for the cushion on a cash balance plan. There is no guidance than I am aware of that allows one to do this on a "career avg" type formula. It is up to interpretation of the code/reg at this point. It seems unreasonable to me that future salary increases in a cash balance plan will increase the FT, which is what the cushion is about.

However, I have posted this same issue on ACOPA and some responses were that some projection of benefits/with proration is reasonable.

My reading of the ACOPA posts differs. I see no justification for assuming that the accrued cash balance account (and its associated accrued annuity benefit) will be increased for future compensation increases. This is not a type of benefit that reflects final pay. However, if you are using a PEP design, then you should be computing a cushion amount.

[Guest Sus95]

I am running into this same issue right now. My valuation vendor is projecting benefits to NRD with future salary credits and salary scale, then prorating benefit at NRD by P/P, which is then used for the cushion on a cash balance plan. There is no guidance than I am aware of that allows one to do this on a "career avg" type formula. It is up to interpretation of the code/reg at this point. It seems unreasonable to me that future salary increases in a cash balance plan will increase the FT, which is what the cushion is about.

However, I have posted this same issue on ACOPA and some responses were that some projection of benefits/with proration is reasonable.

My reading of the ACOPA posts differs. I see no justification for assuming that the accrued cash balance account (and its associated accrued annuity benefit) will be increased for future compensation increases. This is not a type of benefit that reflects final pay. However, if you are using a PEP design, then you should be computing a cushion amount.

I did see only "one" response that indicated a projection of benefits, but others did indicate that there should not be any projection, which is actually what I agree with, except that my software provider is calculating a cushion for cash balance plans using projected salaries. I should probably ignore this portion of the cushion until further guidance is received eventually!!

[Blinky the 3-eyed Fish]

You should definitely ignore it. I too would give them a call and ask why they believe the compensation increases affect 404(o).

[mwyatt]

Conceptually, cushion funding is comprised of two parts:

1) 50% of Funding Target (taking into account 2 year amendment lookback for HCEs on small plans), and

2) Increase on FT benefit given future salary increases.

Focusing on 2, which I think is the issue, in a standard final average salary plan one could argue that future salary increases would factor into the benefit accrued through the beginning of the year for FT purposes. However, in a CB plan or an old line unit credit plan, one would have to look at would future salary increases have any impact on the benefit accrued through the beginning of the year at the end of the day. Think the answer would be no. Future salary increases would only impact future accruals. So for a regular CB plan, I'd say that the effect of 2 would be $0.