Cash balance

[QNPG]

Is it permissible to recognize past service for benefit accrual purposes in a cash balance plan?

My instict is to say no since upon choosing the cash balance addendum in the IDP DB document the entire benefit accrual section, which contains the provisions for crediting past service, is greyed out.

If my insticts are correct, I'd appreciate someone explaining WHY???

Thanks for any help!

[Effen]

I don't see why not, assuming your benefits comply with all of the applicable non-discrimination rules (401(a)(4), 410(b), 401(a)(26)).

I don't know what an "IDP DB document" is, but I expect that it is some sort of prototype like document that doesn't want you to do it. Just because it doesn't fit into their box, doesn't mean you can't go buy a new box.

[QNPG]

I don't see why not, assuming your benefits comply with all of the applicable non-discrimination rules (401(a)(4), 410(b), 401(a)(26)).

I don't know what an "IDP DB document" is, but I expect that it is some sort of prototype like document that doesn't want you to do it. Just because it doesn't fit into their box, doesn't mean you can't go buy a new box.

IDP document = Individually designed document a.k.a. not pre-approved by the IRS as to the form of the plan.

[FAPInJax]

The main reason to add past service is to create a funding target making the maximum deduction have a cushion. This generally enables the contribution of the contribution credit (without using at-risk rules).

[John Feldt ERPA CPC QPA]

Suppose that you are designing the plan to accrue the full 415 limit on the first day of the plan. How will the plan satisfy the 133 1/3 accrual rule?

$1625 on 1-1-2011 (all past service accrual)

$1625 on 12-31-2011 (no accrual during the 2011 plan year)

$3250 on 12-31-2012, the 2012 accrual = $1625 which exceeds 133 1/3 of the previous accrual (which was zero)

Must a cash balance plan satisfy the 133 1/3 accrual rule?

Can the past service accrual be counted as part of the first year's accrual to avoid this problem?

[FAPInJax]

My understanding is that cash balance plans must be careful NOT to violate the accrual rules. Therefore, you are correct that the full accrual of the 415 amount at the BOY is not an option because of the violation of the rules.

[QNPG]

Suppose that you are designing the plan to accrue the full 415 limit on the first day of the plan. How will the plan satisfy the 133 1/3 accrual rule?

$1625 on 1-1-2011 (all past service accrual)

$1625 on 12-31-2011 (no accrual during the 2011 plan year)

$3250 on 12-31-2012, the 2012 accrual = $1625 which exceeds 133 1/3 of the previous accrual (which was zero)

Must a cash balance plan satisfy the 133 1/3 accrual rule?

Can the past service accrual be counted as part of the first year's accrual to avoid this problem?

Question # 1. The way we understand the 133 1/3 rule is that we look at the annual rate that generated the total benefit, e.g., I can provide a benefit of $100 per year of past service benefit with past service limited to 5 years. Past service is defined as service prior to the effective date of the plan. The total past service benefit at the effective date of the plan will be $500.00. In testing for compliance of the 133 1/3 rule, I would be looking at the $100 not the $500.

Question #2. Yes. The regs stipulate that a cash balance must comply with the 133 and 1/3 rule.

Question # 3. See answer to item # 1.

[SoCalActuary]

Applying the 415 limits is necessary for plan benefit funding and payout.

But it is not directly related to the issue of 133 accrual rule. You can certainly have the benefit accrual pattern you described in a plan that grants past service, whether it is cash balance or traditional formula.