Cash Balance Plan RMD

[HKSUN]

I understand that cash balance plan should follow 401(a)(9) rules (DB rules) to calculate RMD amount. My question is: do I need to adjust the hypothetical account balance to reflect RMD withdrawal? If we adjust the balance and the plan is frozen, it would result in accrued benefit decreasing, which in turn reduces the next RMD amount. Shouldn't the DB RMD with Life Annuity payment be level? 

[Lou S.]

The RMD is his annuity benefit in the form that he elects. That won't decrease once started but could increase if there are future accruals, which in  this case sounds unlikely.

Yes you reduce the hypothetical account for the withdrawal paid.

Yes you have to preserve the annuity benefit to avoid anti-cut back provisions.

 

[CuseFan]

Also check the document. If you truly convert the balance to an annuity then the balance should go to zero and you only have the annuity (if plan frozen), or if not frozen, then each year's CB credit is converted into additional annuity benefit.

[HKSUN]

3 hours ago, Lou S. said:

The RMD is his annuity benefit in the form that he elects. That won't decrease once started but could increase if there are future accruals, which in  this case sounds unlikely.

Yes you reduce the hypothetical account for the withdrawal paid.

Yes you have to preserve the annuity benefit to avoid anti-cut back provisions.

 

Thank you Lou! But when the plan is active (not frozen), CB plan usually does not preserve accrued benefit and PVAB right? Is it because of the frozen status that changes the CB plan to NOT preserve? 

Also, if we reduce the hypothetical account balance every year with the RMD amount, what happens once the hypothetical account balance is depleted after several years? 

 

[HKSUN]

2 hours ago, CuseFan said:

Also check the document. If you truly convert the balance to an annuity then the balance should go to zero and you only have the annuity (if plan frozen), or if not frozen, then each year's CB credit is converted into additional annuity benefit.

Thank you CuseFan! Let's assume the CB plan is not frozen. Should the additional annuity benefit be the net increase in hypothetical account balance (pay credit + interest credit - RMD withdrawal) or straight new CB pay credit plus interest credit? 

[Lou S.]

A CB plan is a type of defined benefit plan. You can't have the annuity decrease whether it is active or frozen. The participant can always elect the annuity benefit and Plan has to either pay it or purchase an annuity to pay him. Unless there is some reason the plan can't like it's termination and underfunded or something like that. Assuming it's not a PBGC plan which will have it's own additional rules when terminating.

[HKSUN]

9 hours ago, Lou S. said:

A CB plan is a type of defined benefit plan. You can't have the annuity decrease whether it is active or frozen. The participant can always elect the annuity benefit and Plan has to either pay it or purchase an annuity to pay him. Unless there is some reason the plan can't like it's termination and underfunded or something like that. Assuming it's not a PBGC plan which will have it's own additional rules when terminating.

What if the interest crediting rate is actual rate of return and the return is negative? Assuming there's no pay credit with a negative interest credit, the account balance decreases, which in turn generates a smaller accrued benefit. Did you mean that the accrued benefit in this case still needs to be preserved? 

[CuseFan]

 

20 hours ago, HKSUN said:

Should the additional annuity benefit be the net increase in hypothetical account balance (pay credit + interest credit - RMD withdrawal) or straight new CB pay credit plus interest credit? 

If not frozen, you still have annuitized the prior balance, so it goes to zero. Each year's subsequent credit then gets converted to annuity and added. There is no subsequent interest credit because there is no beginning account balance - unless the plan weights current year contribution credits for interest. The only way you can draw down like installments from a continuing account balance is if installments are allowed by the plan and elected.

[HKSUN]

56 minutes ago, CuseFan said:

 

If not frozen, you still have annuitized the prior balance, so it goes to zero. Each year's subsequent credit then gets converted to annuity and added. There is no subsequent interest credit because there is no beginning account balance - unless the plan weights current year contribution credits for interest. The only way you can draw down like installments from a continuing account balance is if installments are allowed by the plan and elected.

But the CB plan is still ongoing and not frozen. The only concerning event it the RMD, so I don't think the plan needs to annuitize the account balance yet. Given the account balance is not considered to be zero, should I subtract RMD withdrawal from the prior balance? 

[Mike Preston]

17 minutes ago, HKSUN said:

But the CB plan is still ongoing and not frozen. The only concerning event it the RMD, so I don't think the plan needs to annuitize the account balance yet. Given the account balance is not considered to be zero, should I subtract RMD withdrawal from the prior balance? 

You are not listening. Read every message in this thread again.

[HKSUN]

1 hour ago, Mike Preston said:

You are not listening. Read every message in this thread again.

Lou S. seems to argue that RMD should reduce the hypothetical account balance, while CuseFan states there's no more hypothetical account balance once the RMD starts. That's why I'm a little confused as to whether an account balance still exists once the RMD starts in a CB plan. Would you please help clarify a little more? 

 

[Mike Preston]

When Lou was talking about reducing the hypothetical account for amounts paid it would have been clearer if he said you reduce the hypothetical account to zero to reflect the fact that a benefit has been started.