Frozen Cash Balance Plan

[LarryDavid]

Question on testing a frozen cash balance plan:

If a Cash Balance plan is frozen for contribution credits, but still provides interest credits, are participants considered to be "benefitting"? I would think the logical answer is no, however if the plan were NOT frozen, I know the accrual rate is based on BOTH contribution and interest credits earned during the year. So there seems to be a contradiction in that interest credits are only counted towards accrual rates if there is also a contribution credit provided during the year. Is this correct?

[Bill3]

Question on testing a frozen cash balance plan:

If a Cash Balance plan is frozen for contribution credits, but still provides interest credits, are participants considered to be "benefitting"? I would think the logical answer is no, however if the plan were NOT frozen, I know the accrual rate is based on BOTH contribution and interest credits earned during the year. So there seems to be a contradiction in that interest credits are only counted towards accrual rates if there is also a contribution credit provided during the year. Is this correct?

Most cash balance plans are "front-loaded interest credit plans" as defined in IRS Notice 96-8. Under these plans, the right to all future interest credits is earned at the same time the pay credit is added to the cash balance account. As a result, accruals are suspended by stopping pay credits and even though interest credits continue, as they must, no one is benefiting from the plan. There are cash balance plans that do not meet the Notice 96-8 requirements, often because the interest crediting rate is not on the 96-8 approved list, and the accrual for the year, under the annual method, may need to reflect the impact of the interest crediting rate changing from the end of the last plan year to the end of the current plan year. But if your plan is 96-8 compliant, then suspending pay credits would make all future accruals zero and no one would be benefiting.

[LarryDavid]

Thanks Bill. That was very helpful.