Cash Balance Plan Term - Interest Crediting Rate

[Hojo]

I know this has been brought up before, but I can't find any examples and I'm looking for some clarification. I’m hoping that you can help me with a question since it was brought up during a recent audit of a termination of a cash balance plan.　 It is specifically in regards to IRC 411(b)(5)(B)(vi)(I) and the 5 year average of interest crediting rates and when/how they apply.　 This is a purely hypothetical example.

In the following example, how would the Cash Balance Account be determined as of 12/31/2013?

Plan Term 4/30/2011.　 Cash Balance Account as of 12/31/2010: $1,000 no more pay credits.

Interest Crediting Rate as defined in plan

2006: 4.50%

2007: 4.50%

2008: 4.50%

2009: 4.50%

2010: 5.00%

2011: 6.00%

Would you use the 2011 rate of 6.00% for 4 months of 2011 and then the average for the other 8 months of 2011 and then 2012 and 2013 (ie, 6.00*4/12 + 5.00 + 4.50*3 + 4.50*8/12)? Or would you use an average for all of 2011-2013 (ie, 5.00 +4.50*4)?

How would this change if the plan term date were 12/31/2011?

Thanks for any help you can provide.

[AndyH]

Assuming the interest crediting is a floating rate, the language seems clear that it is the average during the 5 year period ending on the term date, so wouldn't that be your first proposed 4/12, 8/12 solution?

But if this is an amended, fixed, rate it would seem that the answer is 6%

[Hojo]

Yes, this is assuming it is a floating rate. I still don't get why the regs didn't just say that the interest crediting rate continues as defined in the plan until the balance is paid. Thats seems much more reasonable and easier that coming up with a 5 year average weighted average dependent on the plan termination date..

[AndyH]

Well, what if the plan credited actual earnings, or some equity index and the result was a one year huge rate. If you were locked into that forever the cost would be bizarre. And on the flip if the return tanked the participant would lose big time. Either way that would be a result of the decision to terminate the plan.

[Hojo]

Not totally because I'm not saying to freeze the rate, but to follow the terms of the plan. Meaning that if it were a variable rate (as assumed) and the actual earninngs were 25% one year and 2% the next, you would still move on to the 2%, not freeze at the 25%, until the plan was paid out.

[Hojo]

Also, got a repsonse from the PBGC regarding this question....

The PPA statute does not show how the 5 year average should be calculated, but it does say that the 5 year average rate should be used after the plan's termination date. The PBGC proposed regulation and IRB2010-48 each give plan practicioners an idea as to how to calculate the 5 year average. From an audit perspective, we have accepted both methods.

If you follow IRB 2010-48 under page 793 (plan termination section), the guidance says to use interest credit rates for less than 1 year length adjusted and weighted proportionately. I belive that you example below will follow this method. Since the plan terminated 04/30/2011, the 5 year average will be based on the interest crediting rate will be the average of (2011 rate X (4/12) +2010+2009+2008+2007+2006rate X(8/12)) all divided by 60 months. The 5 year average rate will be used after 04/30/2011.

If you follow the PBGC proposed regulation, the guidance does not count the partial interest crediting years. When the plan terminates mid-year such as 04/30/2011, we will use the 5 years of (2010, 2009,2008,2007,2006) and this average will be used for interest crediting periods after 12/31/2010 instead of 04/30/2011.

Both methods are appropriate and for our audits we will check that a 5 year average interest crediting calculation was used when the plan defines the interest crediting rate as a variable rate. At some point in time, when the PBGC regulation becomes final, we hope that plan practicioners will used the PBGC method in the proposed regulation.