Frozen Cash Balance Plan

[cohendrake]

This is a church plan so maybe this works but I have my doubts:

A) Monthly benefit defined as NRA Cash Balance Account divided by a annuity factor based on 417(e) mortality table and

30-year Treasury rate @ first day of year of retirement

B) Benefit accruals frozen as of 1/1/2007

C) As 30-year Treasury rates tumbled recently (and for 2009) the annuity factor rose and monthly benefits dropped so that

someone retiring at age 65 would get a monthly benefit about 15% lower if they retired now (or in 2009) than they would

have had they retired in any other year since the freeze.

Any problems?

[Effen]

Seems ok to me. Keep in mind they really couldn't have had the benefit in 2009. What you were showing was a benefit payable at NRD, based on the expected future growth. In 2009 the projected cash balance account was anticipated to provide a benefit that is 15% higher than it is now because interest rates have declined. That is just a function of the interest rates and not a problem. I believe PPA confirmed that this is not a 411(d)(6) violation.

When we do benefit illustrations we say the project benefit at NRD is only an estimate and will change over time.

[cohendrake]

I'm hoping you're right but from a practical angle you've got people getting a statement as of 1/1/10 telling them their monthly benefit at retirement is $33.80 and then they get the 1/1/11 statement saying it's $28.12 at that same retirement age with the possibility of going lower. Confusing to me when it's supposed to be a Defined Benefit plan and possibly to a judge some day.

[Effen]

Maybe you should stop putting estimated information on the benefit statements. There is really no reason for it to be there.

Yes, it is a defined benefit plan, but the benefit that is defined should be the cash balance account. If you are going to quote a projected monthly benefit on the participant statements, you should also tell then that it is only an estimate.

Our cash balance statements do not contain monthly projected benefits for just this reason.

[John Feldt ERPA CPC QPA]

I agree with Effen. If the plan uses a variable rate, the value of the annuity at retirement age, when based on the current interest rate, is unnecessary and is more likely to be meaningless.

Perhaps you could make a long-term interest rate assumption to use every year so the statements have more consistent values shown. Use that to project to retirement and to convert to the annuity, but be sure to pick the assumptions wisely to avoid disappointed participants. Be sure to disclose those assumptions in the statement, explaining that the actual results will vary. Or better yet, don't show the annuity with the projection.

[cohendrake]

Thank you for the responses. This happens to be a real case and they don't pay lump sums so the monthly benefit is what the people focus on.

600 participants split fairly equially between active, vested terminees, and retirees. We're taking over for the 1/1/13 valuation.

The prior actuary last did employee statements as of 1/1/10 when 30-yr Treasuries were around 4.5% and now that they're around

2.9% it translates into a 15% reduction in the monthly benefit for people who were told their benefits were frozen.

I'm wondering if this would be allowed were it an ERISA plan and not a church plan.

[david rigby]

...they don't pay lump sums...

Why have a cash balance plan without a lump sum option?

(It's just rhetorical; no reply expected.)

[Effen]

I also have a cash balance plan that doesn't pay lump sums - I think these can be separate decisions. The cash balance account is converted to an annuity at retirement, and doesn't change after it is in pay status (I assume Karl's plan works the same way?). Cash balance is just the way to accrue the benefit. I agree it is odd not to pay the lump sum, but it is a way to guarantee a lifetime income for the participants.

Karl - church plan or not church plan, the answer is the same.

[AndyH]

Variable rate actuarial equivalency factors for purposes other than 417(e) should be illegal and/or avoided.

IMHO

(but I got some too)

[Grendel77]

karl,

my opinion (which stinks) is that the plan would have to pay the $33.80 in your example. This is a minority opinion, but it's based on the observation that: The accrued benefit is the annuity, and 411(d)(6) protects the accrued benefit. thus 411(d)(6) protects the annuity.

[Effen]

Grendel - my initial response was simply to say "you are wrong", but that doesn't really help if I can't prove it. So, I went looking for a reason. I may be wrong on my reasoning, but here goes.

411(d)(6) relates to decreases caused by amendments. Assuming the plan is not being amended from year to year to change the interest crediting rate, 411(d)(6) does not apply

411(a)(13) breaks the relationship with 417(e) and therefore the hypothetical account balance can be treated as the accrued benefit and would not be permitted to be decreased

You also might want to take a look at Announcement 09-82 and Notice 07-06 which defined acceptable interest crediting rates.

I believe the theory is that the hypothetical account balance and the interest crediting methodology are protected and cannot be changed without dealing with 411(d)(6), however fluctuations in the projected monthly benefit commencing at NRD that is based on the current hypothetical account balance is not protected. It really should just be viewed as a current estimate, similar to the lump sum value of at traditional db plan - the lump sum value fluctuates each year as interest rates change. However, once the benefit goes into pay status, then it cannot be changed.

411(a)(13)Special rules for plans computing accrued benefits by reference to hypothetical account balance or equivalent amounts.—

411(a)(13)(A)In general.—

An applicable defined benefit plan shall not be treated as failing to meet

411(a)(13)(A)(i)

subject to subparagraph (B), the requirements of subsection (a)(2), or

411(a)(13)(B)(ii)

the requirements of subsection (a)(11) or ©, or the requirements of section 417(e), with respect to accrued benefits derived from employer contributions,

solely because the present value of the accrued benefit (or any portion thereof) of any participant is, under the terms of the plan, equal to the amount expressed as the balance in the hypothetical account described in subparagraph © or as an accumulated percentage of the participant's final average compensation.

[Grendel77]

effen, thanks for taking the time to address this, I really appreciate it.

Your point about fluctuating interest rates not being an amendment carries the day here I think.

I'm less taken with the 411(a)(13) -> 417(e) comments, but I'm on board with the idea that the annuity is not protected if a variable rate is used for the interest credits.