Cash Balance Plan - Fixed Interest Credit & Meaningful Benefits

[Guest mcw]

What are your thoughts on a fixed interest credit for a cash balance plan? Are you doing it? What rate?

Also, what are your thoughts on "meaningful benefits" under 1.401(a)(26)-3©? Is 1.5% of compensation enough?

Thanks

[John Feldt ERPA CPC QPA]

I think we have a plan that was set up with 5%. Otherwise, all of our other plans use one of the variable rates that are automatically considered okay.

For 401(a)(26), we project the credit (excluding the interest credit) that is being made to the account for the year to the retirement age by accumulating it at the interest crediting rate. That projected credit is converted to an annuity, then divided by compensation to see if it exceeds 0.50% of pay. If so, then it's meaningful to Paul Schultz and his memo from June 6, 2002.

[SoCalActuary]

You are probably OK on a fixed interest rate, so long as it does not exceed some reasonable average of market rates.

For example, 5% is pretty safe because 3rd tier rates have been higher. 5.5% is pretty safe as well. 6.0% is a little closer to the lowest rate in the past 36 months (6.38% in September 07).

If you were using the PBGC's 3rd tier rate, the low point had 6.07% in September 09.

Meaningful benefits for a CB addition are not mentioned in any of the formal or at-microphone guidance that I have seen or heard. The only guidance is the Paul Schultz and current IRS position: whatever rate produces an accrual of 0.5% of pay as a monthly benefit at NRA. If your participants don't have at least 40% receiving this rate, then you appear to have benefits that are not meaningful, and you don't get 401(a)(26) approval.

[AndyH]

Jim Holland said at the June 2009 Boston ASPPA/COPA conference that .50% is the IRS' current thinking on the appropriate standard.

[SoCalActuary]

Jim Holland said at the June 2009 Boston ASPPA/COPA conference that .50% is the IRS' current thinking on the appropriate standard.

Andy, are you talking about the CB plan annual addition or the equivalent benefit at NRA?

[Guest chuckb]

I recently got a favorable determination letter on a CB plan with a fixed 5% IC rate. I guess that doesn't necessarily mean that it will be considered qualified in operation, but for the time being I plan on using fixed rates for new plans.

As for the 401(a)(26) question, I make sure that 40% of the population is getting at least a .5% benefit at retirement. I project the Hypothetical Allocation (pay credit) to NRA using the IC rate and convert to an annuity with the plan's AE assumptions.

Hope that's helpful!

[AndyH]

Jim Holland said at the June 2009 Boston ASPPA/COPA conference that .50% is the IRS' current thinking on the appropriate standard.

Andy, are you talking about the CB plan annual addition or the equivalent benefit at NRA?

Good question - I intentionally omitted that detail because I'm not sure. I interpreted it as both, it was clearly within the context of whether the Schultz memo is still current thinking, but I can't say with certaintly one or the other.

I'm sure others heard it - it was closing Q&A I believe. I'm pretty sure Mike Preston was there, and probably Tom Finnegan also.

[Mike Preston]

I believe that 0.5% as an annuity at normal retirement is the threshold and you have to have 40% meet that threshold. This isn't new stuff. And nothing new has come along to replace it.

[AndyH]

Jim Holland said at the June 2009 Boston ASPPA/COPA conference that .50% is the IRS' current thinking on the appropriate standard.

Andy, are you talking about the CB plan annual addition or the equivalent benefit at NRA?

I'm sorry, I misread the question. Yes, definitely .5% as an annuity, not the credit. I'm not sure if the .5% is current comp or average comp (in the case of a final average pay DB), that is what I remain uncertain of.

[Mike Preston]

Average comp, IMO. It is an interesting issue, though. Consistent with the requirement that the benefit has to be measured based on the provisions of the plan with respect to the normal retirement age, I would think that the definition of benefit compensation in the plan would control. If that is a 3 year average, so be it. However, there is no requirement that the benefit in the plan be specified based on pay. In the absence of a pay related benefit, I agree that it is unclear whether the IRS would force use of "current year compensation" versus "high x-year average."

Could one rely on the fact that every plan has to have a top-heavy benefit which includes a compensation averaging methodology and apply that if no other compensation averaging exists within the four corners of the document?

[John Feldt ERPA CPC QPA]

I know of no official reliance for that. Could a plan submit for a D letter which also asks for the IRS to rule on the 401(a)(26) testing methodology?

[Mike Preston]

Absolutely. The IRS routinely checks for a26 issues on DL submissions, so it isn't necessary to ask.