Termination Liability in Cash Balance Plan

[Pension RC]

Is it possible for the termination liability in a cash balance plan to be lower than the sum of the individual hypothetical accounts?

Thanks for any responses!

[Lou S.]

I don't see how it could be lower on a termination basis. It could be higher if participants elect annuity benefits but I don't see how it could be lower than the sum of the hypothetical accounts that are being paid out.

[My 2 cents]

If the plan is terminating, then all benefits must be distributed as either lump sums or through the purchase of annuities.

a. Payment of a lump sum: Isn't it a standard element of cash balance plan design that the lump sum cannot be less than the account balance?

b. Purchase of annuities: This can be more complicated, since the participant can choose between an immediate annuity payable as a QJSA or a deferred annuity with the various retirement options preserved.

Consider the following questions if a deferred annuity is purchased:

• Must the annuity preserve the right, presumably inherent in most (but not all!) cash balance plans, to cash out at any time after separation from service?
• Must the annuity preserve the right, presumably inherent in most (but not all!) cash balance plans to provide, as a pre-retirement death benefit, a cash payment equal to the cash balance?
• How does the interest credit rate compare to the discount rate underlying the annuity purchase cost? It is possible that the interest to be credited on the cash balance will be lower than the underlying discount rate, so that the longer the benefit is deferred, the lower the anticipated cash balance would be relative to the anticipated annuity reserve at retirement age. This could have greater significance if the plan does not generally allow participants to cash out the cash balance at benefit commencement (rare, but there are such plans).
• In general, cash balances will grow at interest only while annuity reserves will grow at interest plus mortality (although taking into account anticipated pre-commencement death benefits).

Overall, one would not expect the plan termination liability to be less than the current total of the account balances, but perhaps there are odd provisions or unusual demographics that could lead to such a result. I would be surprised to account that, though.

[SoCalActuary]

Seems to me that you must include the valuation of the death benefit, and I don't find any cash balance plans in my world that pay a lower death benefit than the cash balance.

[My 2 cents]

Seems to me that you must include the valuation of the death benefit, and I don't find any cash balance plans in my world that pay a lower death benefit than the cash balance.

Even if the plan has no possibility of forfeiture due to death before commencement, doesn't 417(e) permit full discounting for interest and mortality in the calculation of the amount payable as a lump sum?

Thinking of it another way, since all plans (including cash balance plans) are able, if they so provide, to charge the participant 100% of the cost of the pre-retirement death benefit coverage, wouldn't any pre-retirement death benefits offered without such cost be an employer subsidy that does not have to be factored in when calculating the lump sum payable?

[SoCalActuary]

Does 417(e) apply to this plan? Mine are exempt. Futher 417(e) is a minimum value in my world for those plans covered, so the plan pvab would still apply.

[My 2 cents]

To the extent that the plan is being taken over by the PBGC, the participants LOSE the right to elect cash, and it could be that the 4044 value of an account is less than the current account balance. To the extent that participants must elect away from annuities in a standard termination, it is at least possible that the present value of a benefit taken as an annuity, deferred for thirty years based on accumulations at 1-year Treasury rates, would be less than the current account balance.

And then there are cash balance plans that don't even allow lump sums above a certain low amount.

Death benefits greater than the standard QPSA are not protected and can be amended out without violating 411. So the termination value could well exclude the present value of non-QPSA death benefits.