Cash Balance Interest & Muslims

[Nate S]

A group of physicians is considering a cross-tested combination, 401(k) and cash balance.  One owner-doctor is Muslim and is questioning the hypothetical interest on the allocation when expressed as a fixed-rate.  He is fine with the 401(k) assets being market-driven, but has concerns about the cash balance allocation.  1.  Anyone ever handle anything similar? 2.  Can the hypothetical interest be 0 for his allocation class or is that a reduction?  3.  Is there a better way to explain the interest part that may avoid his objection?

[C. B. Zeller]

The hypothetical interest credits in a cash balance plan are just that - hypothetical. They are a fiction designed to account for the difference between the accrued benefit payable at retirement, and the present value of that accrued benefit (aka, the hypothetical account balance). There is no difference between a plan that says "I'm giving you $100,000 now, with 4% hypothetical interest per year, and you have 10 years until your normal retirement date" versus a plan that just says "I'm giving you a benefit such that the lump sum payable at your normal retirement date is $148,024." As long as they don't have a problem with promising to pay somebody some amount of money at some point in the future - since that's essentially what a DB plan is - a cash balance formula versus any other type of formula shouldn't matter.

Of course, I'm no theological scholar. There is no reason you couldn't do a cash balance plan with an interest crediting rate of 0%, if that would help them feel better about it.

[Peter Gulia]

If the questioning physician wants advice, he might consult Asrar Ahmed, the author of ERISA and Sharia Law and Can Sharia and ERISA Coexist?.

He is an EBSA Senior Investigator and presumably would not provide advice on a question of U.S. law that could come before the Labor department.  But perhaps he might on his own time provide his advice on a question of religious law, which the Labor department would not consider.

One can find him on LinkedIn.

[CuseFan]

Yes, you can have 0% CB ICR but may have issues satisfying 401(a)(26) meaningful benefits if plan-wide and other issues if only for HCE(s).

We have DBP and CBP with Sharia-compliant investments (and an internal investment group that does it), and traditional DBs have an assumed investment return within funding, which is essentially the same as a CB ICR. These are usually exclusively Muslim-owned practices rather than one or two within an otherwise non-Muslim group.

[Nate S]

On 10/4/2021 at 4:36 PM, C. B. Zeller said:

The hypothetical interest credits in a cash balance plan are just that - hypothetical. They are a fiction designed to account for the difference between the accrued benefit payable at retirement, and the present value of that accrued benefit (aka, the hypothetical account balance). There is no difference between a plan that says "I'm giving you $100,000 now, with 4% hypothetical interest per year, and you have 10 years until your normal retirement date" versus a plan that just says "I'm giving you a benefit such that the lump sum payable at your normal retirement date is $148,024." As long as they don't have a problem with promising to pay somebody some amount of money at some point in the future - since that's essentially what a DB plan is - a cash balance formula versus any other type of formula shouldn't matter.

Of course, I'm no theological scholar. There is no reason you couldn't do a cash balance plan with an interest crediting rate of 0%, if that would help them feel better about it.

Thank you!  We will look at alternative ways to draft the allocation formula as well!

[Nate S]

16 hours ago, CuseFan said:

Yes, you can have 0% CB ICR but may have issues satisfying 401(a)(26) meaningful benefits if plan-wide and other issues if only for HCE(s).

We have DBP and CBP with Sharia-compliant investments (and an internal investment group that does it), and traditional DBs have an assumed investment return within funding, which is essentially the same as a CB ICR. These are usually exclusively Muslim-owned practices rather than one or two within an otherwise non-Muslim group.

The Dr is largely ok with the investment choices being subject to market influences, whether or not there may be a interest component within the fund/model.

What issues could there be with using a 0% ICR for an HCE?  Is 411 a consideration since his CB amount will have a lower act eq accrued benefit @ NRA each valuation?  Or is that avoided as long as the Plan is not frozen?

[C. B. Zeller]

If you are talking about using a different interest crediting rate for different groups of employees, first make sure that your plan document will allow it.

I vaguely recall hearing about an issue with using a lower interest crediting rate for HCEs, that it was discriminatory because it was equivalent to a larger early retirement subsidy or something like that. I am probably messing up the details. I think it was in an ASPPA presentation. If I can find it, I'll let you know.

I don't see any 411(b) issues with a 0% interest crediting rate. The accrual each year would just be equal to (pay credit) / (APR at NRA). In other words, a flat benefit formula.

[CuseFan]

3 hours ago, C. B. Zeller said:

I vaguely recall hearing about an issue with using a lower interest crediting rate for HCEs, that it was discriminatory because it was equivalent to a larger early retirement subsidy

Yes, that is the potential issue. I do not think there is definitive guidance/prohibition and I do recall getting a D-letter years back for such a design, but before all the hybrid regs were finalized. I would just suggest treading carefully and researching thoroughly before going that route. But if 0% for all, or a subset that satisfies coverage/BRFs, then not an issue. Or, consider using actual ROR as the ICR.