Cash Balance Pay Credit

[Guest Heather_PA]

My study partner and I ran into another question that we are uncertain how to answer.... we need to determine the pay credit to a non-key employee in a cash balance plan that has always been top-heavy. We know that the years of service for the top-heavy benefit are 5 years. In addition to providing us with the account balance, the annuity factor, and the form of annuity, the question also provides us with the average final 5 years pay and the average final 3 years pay. I am taking the position that we do not need to consider the average final 3 years pay because the question states that the plan has always been top heavy and that the years of service for the top-heavy benefit is 5 years. Am I correct, or do we somewhere need to consider the final 3 year average??

[Effen]

What kind of exam are you studying for? I have several problems with this question, but the number of years of average compensation used to determine the TH minimum benefit cannot exceed 5. Therefore, I would probably use the 5-yr ave. comp. to determine the minimum, unless it says somewhere else in the question that the plan is using the 3-yr ave. for this purpose.

M-2 Q. What is the defined benefit minimum?

A. (a) The defined benefit minimum requires that the accrued benefit at any point in time must equal at least the product of (i) an employee's average annual compensation for the period of consecutive years (not exceeding five) when the employee had the highest aggregate compensation from the employer and (ii) the lesser of 2% per year of service with the employer or 20%.

[Guest Heather_PA]

What kind of exam are you studying for? I have several problems with this question, but the number of years of average compensation used to determine the TH minimum benefit cannot exceed 5. Therefore, I would probably use the 5-yr ave. comp. to determine the minimum, unless it says somewhere else in the question that the plan is using the 3-yr ave. for this purpose.

M-2 Q. What is the defined benefit minimum?

A. (a) The defined benefit minimum requires that the accrued benefit at any point in time must equal at least the product of (i) an employee's average annual compensation for the period of consecutive years (not exceeding five) when the employee had the highest aggregate compensation from the employer and (ii) the lesser of 2% per year of service with the employer or 20%.

It's an exam on administering defined benefit plans. This specific questions does not give me any additional information other than what I've shared, which is why we were confused on whether or not to use the final 3 year average. We're going to go with the 5 year average in our calculation. Thank you for the help!!

[david rigby]

Effen is correct. (In case you did not know, he is quoting from IRS regulation 1.416-1.)

To expand a bit on his comment, most tests will include some generic preliminary statements about what you (the test-taker) should assume. Very common is a statement that you should assume/apply the regulations and/or statute in effect at X date. Note that since regs and/or statutes generally define minimums or maximums, the statement means you should not infer anything beyond the min or max contained in the applicable reg or statute.

[Effen]

It's an exam on administering defined benefit plans.

What I meant was, who is sponsoring the test? ASPPA? IBEBP (CEBS)? Other? Specifically, what exam are you studying for.

[John Feldt ERPA CPC QPA]

This may be only loosely related, but here goes:

It is not necessary for the top heavy minimum to be expressed as a cash balance pay credit in a cash balance plan. Generally, a top heavy cash balance plan provides the top heavy minimum in the DC plan anyway, but if that is not the case, then the cash balance plan defines an accrued benefit equal to the greater of the top heavy minimm (2% x TH years x 5-yr avg pay) or if greater, the accrued benefit provided from the conversion of the cash balance account into an annuity, payable at retirement age. The pay credit in a top heavy cash balance plan would simply be the usual formula that applies for any pay credit, however, a minimum accrued benefit must be earned, but it does not have to be in the form of a cash balance pay credit.