accruing a benefit before meeting a one-year wait for eligibility to participate in a cash balance plan

[gle318612]

I am seeking any and all thoughts on the following. There is an existing cash balance plan where one begins to participate in the plan at the beginning of the month following date of hire. Accruals (pay credits and interest credits) begin after participatiion begins. A contemplated design change to be made prospectively for new hires would implement a one-year wait for eligibility to participate but such persons would accrue a benefit from the first of the month after hire. I assume hours of service prior to participation would count for vesting purposes.

This concept of accruing a benefit prior to meeting eligibility for participation is alien to me. Thoughts on where one might find guidance that would allow or preclude such a design would be appreciated.

Would such folks (in their eligibility period but with a benefit accrual) be counted as participants for PBGC per-participant PBGC premium purposes. The language in the 2014 instructions indicates" For premium purposes, “participant” means an individual (whether active, inactive, retired, or deceased) with respect to whom the plan has Benefit Liabilities as of the Participant Count Date." Until such individuals become participants in the Plan under the contemplated design, if the individual has not yet the eligibility period as of the Participant Count Date, there is no actual benefit liabilities and thus seemingly the answer is "no" based on the PBGC instructions. Again, thoughts?

Is this design something being pushed by the consulting firms....?

My sense is this contemplated design won't be considered by the plan sponsor...but would like to know whether such is or isn't allowed by law/regulation.

Thanks.

[Effen]

Actually, it is fairly common in the real retirement world for plans to have a one year wait, but to credit accruals from date of hire. Nothing wrong with it, in fact I would expect it is more common than accruing benefits based on participation. Certainly outside of the small plan world, it is more common.

You are not a participant until you satisfy eligibility. Once you are a participant, you are instantly entitled to a benefit, if you are vested.

[My 2 cents]

As always, only stating my opinions:

1. Other than service prior to age 18 or minimum hours requirements under the plan, no service within the controlled group may be excluded for vesting purposes.

2. It is permissible to exclude from benefit accruals any service prior to plan entry. It is generally also permissible to count service prior to plan entry for benefit accrual purposes.

3. If you are talking about a calendar year cash balance plan, the line of least resistance is to use the year's W-2 earnings to determine the year's pay credit for anyone entitled to one. It is more work to have to segregate earnings during a year into portions prior to plan entry and portions after entry, but either approach would seem to be acceptable (depending on the plan provisions,of course). I don't see a plan that has eligibility requirements but which does not exclude service prior to entry for benefit accrual purposes as "complicated" at all.

4. If an individual has not become a plan participant on or before the last day of the prior plan year, even if they are accruing benefits pending plan entry, you would not count them for PBGC premium purposes (and those benefits would not, under any circumstances, be considered vested - you could amend the plan prior to their actual plan entry to freeze entry, in which case they would never come in and never receive any benefits, and there is no 411 protection of "accruals" for people who are not plan participants).