401(a)(26) for cash balance plans with low interest credits

[AndyH]

Running across situations with cash balance plans having less than 40% of participants accruing a benefit for 2013 less than .5% of compensation because of the use of low interest rates such as 30 year treasuries.

How are others handling this? Amending, ignoring?

Opinions please.

[Effen]

You may, or may not, know, the .5% thing is not statutory. Technically, there is no legal requirement to provide a .5% benefit. It is just a basis the IRS uses if they don't like your design.

That said, I wouldn't worry about it, if it is a "one off" situation caused by declining interest rates. Maybe explain the situation to the plan sponsor, and ask them if they want to take the risk, or if they want to increase benefit in case the IRS makes it an issue.

[AndyH]

Thanks Effen, agree. Appreciate the opinion.

[John Feldt ERPA CPC QPA]

We ended a recent IRS audit where the IRS wanted mathematical proof that the cash balance plan passed 401(a)(26) for 3 years: the year before the year of audit through the year following. During the course of the audit, we noticed the employer had made a mistake in providing their census information - this was regarding employee termination information for one of the years.

This caused a problem that the employee count increased and the plan would need one more individual with a 0.50% benefit accrual to get over the 40% requirement. We looked at accrued-to-date, fresh starts, averaging compensation over various periods, etc., but could not quite get one more person over the 0.50%. The best result was to get one more participant accruing a benefit of about 0.45%.

The IRS closed the case without requiring any action, but they explained that they only closed it because of several two main factors:

1. the additional accrual needed to get one more person to 0.50% would have an insignificant benefit value, and
2. because the plan was already terminated and the participants were paid out, it was not worth requiring action.

FWIW.