cash bal plan design

[Gary]

PPA provides methods for cash balance plans to comply with the age discrimination rules.

It indicates that for two similarly situated participants, the plan will not violate the ADEA rules if the older person has an accrued benefit at least as great as the yonger participant.

Say both earn 50,000 and the credit is 5% of pay. Therefore, each participant would receive a credit of 2,500 for the year.

Say the int credit rate is 4% per year.

One participant is age 30 and the other is age 50.

If the accd ben is defined as the benefit payable at NRA of 62 where the benefit is determined based on increasing the account to age 62 and then converting to an annuity, clearly the younger participant would have a larger accd ben and the ADEA so it seems would be violated.

However, if the AB is defined to be the hypothetical account balance then both would have an AB of 2,500 in this case. And of course that appears to be in compliance with ADEA and is fine. For this example, it is the first year of the plan.

Does this mean that cash balance plans need to be designed where the AB is equal to account bal or am I missing something?

thanks.

I presume that even if AB is account bal for funding it would have to be projected to ARA and then discounted using segment rates to determine FT and TNC.

[ETA Consulting LLC]

No. That was the point of the PPA, to 'deem' the plan non-discriminatory since those two participants are receiving the same 'allocation'. Key words, 'deemed' and 'allocation'. The issue that you are speaking is what the entire IBM case was about. That case stated that a defined benefit plan "by definition", could not provide a decrease in benefits for 'older' participants. So, because of the 'definition' of 'accrued benefit' within DB being based on annuity at the individual's NRA, then the Cash balance failed this primary DB requirement.

When the PPA was passed, it was done on a prospective basis, which left the IBM case to the courts. Even though IBM clearly lost, the courts appeared to rule in their favor; keeping their ruling consistent with the new PPA rules.

This has nothing to do with ADEA. The reason is that it is only the 'technical' definition of accrued benefit within DB plans which creates this difference in value. Time value of money states that a dollar today is worth more than a dollar in the future. In any event, one dollar today is worth only one dollar today. The DB plan, which defines NRA as a fixed point in time; even though it is different lengths for different employees creates a lop-sided advantage to older employees. The PPA ruling merely takes that lop-sided advantage away, so it wouldn't violate ADEA.

Hope this adds a little more perspective.

Good Luck!

[Gary]

if the accd ben is equal to the hypothetical account then they both have ABs equal to 2,500. no problem.

If the accrued benefit is defined as an annuity at NRD then what is the AB for each participant?

We'll assume that for the younger employee his proj bal at NRD is 10,000 and the older employee's proj balance at NRD is 5,000. The APR is 10 under terms of plan at NRD.

[ETA Consulting LLC]

Your point is understood; and was the basis for the entire IBM case and Cash Balance scrutiny in the first place. By definition, the accrued benefit within a DB plan is the straight life annuity at NRA. By definition, the accrued benefit in a DC plan is the account balance. This created the entire issue with age discrimination in Cash Balance plans because the accrued benefit for an older employee with the same amount of service and earning the same salary was lower. So, you are right.

I am not sure about the exact semantics, but as far as I remember, the definition of 'accrued benefit' for a DB plan has not changed. Also, a Cash Balance plan is still a DB plan. So, I think is was a mere rule that 'deemed' the hybrid plan non-discriminatory with respect to age when employees who are simularly situated receives the same allocation. I don't think the accrued benefit changed; either by calculation or by definition.

Hope this helps.

[SoCalActuary]

The equivalent monthly accrued benefit from a cash balance plan is derived as the actuarial equivalent of the hypothetical cash balance. That monthly benefit is tested for 415 compliance, is used for general discrimination testing, and is checked against the accrual rules. But the compound interest effect of projecting to retirement is not considered age discrimination. If an older employee has the same or higher account balance to an identically situated younger person, then this does not prove age discrimination, regardless of the monthly benefit it might purchase.