Too Soon to Do Another Fresh Start?

[NewBieHere]

A cash balance plan had a fresh start effective 01/01/2023 when it had the Cycle 3 restatement. The owner (a physician) wants to know if s/he could do another fresh start to increase the benefit formula in order to increase the tax-deductible limit.

Can this be done right away or should s/he wait/? if s/he needs to wait, how long?

[Effen]

Sorry, but not sure what you mean by "fresh start" and how it would impact the deductible limit?

Are you asking about a potential benefit increase, or are you thinking about terminating the plan and starting a new plan?

Are there NHCEs in the plan?

 

[Lou S.]

 

I believe you are generally "safe" if you have the current benefit structure in place for 5 years but that doesn't mean you can't change it sooner.

A repeated pattern of amendments is a facts and circumstances determination. Is two a pattern? In addition to Effen's questions, I think you'd want to look at more than just the history of the 2023 restatement and possible 2025 amendment. There may be valid business reasons for increasing benefits now. 

 

[CuseFan]

Exactly, what is the historical pattern? If the plan went 5 or 6 years before the last increase in 2023 and now you want one for 2025, probably OK even w/o an underlying business reason other than increased deduction. However, if increases have come through every other year, say 19, 21, 23 and now wants 25 - that is very iffy IMHO. 

A "fresh start" has statutory and operational relevance beyond just an increase in the benefit formula.

[NewBieHere]

It's unclear what happened in 2023 other than the statutory Cycle 3 restatement since the most current adoption agreement was provided. But the section that deals with Fresh Start (it uses the DATAIR product) is filled out, which led me to assume that different benefit provisions existed before 2023. I am under the assumption that the current cash balance formula is the result of 2023 fresh start (perhaps, it was originally set up as a traditional DB and got switched to a cash balance plan).

The plan has been around for less than 5 years. Now, the owner wants to increase the amount of annual credit to the cash balance.

There are NHCEs in the plan.

If we need to make changes via an amendment, how does the accrual rule come into play? What are the some of the issues we should watch out for?

 

[CuseFan]

Accrual rules get applied to an amendment as if it had always been in effect, is my understanding. That is, an amendment would not create an accrual rules violation unless on its own it was not compliant with the rules.

If the plan has been in existence less than 5 years, I'd get all documents and subsequent amendments from the start to see the historical formula changes (if any) before consulting or opining on whether or not it is advisable to do a 2025 benefit increase.

[NewBieHere]

Now that I have all the information, here are all the facts:

In 2019, the plan was established as a traditional DB plan. In 2023, the plan was converted to a cash balance plan with the cash balance credit set at $90K for the owner and $55K for the spouse. Now, the prospective client wants to increase his cash balance credit from $90K to $200K (in essence, he wants to increase so that his retirement benefit will be close to the 415 lump sum). Is it even possible to do this, assuming that it will pass the nondiscrimination testing? I feel like this would certainly violate one of the accrual rules, but I am no cash balance plan expert.

Would it be easier to terminate the plan and start a new plan?

[Effen]

Seems fine to me, assuming is satisfies all the nondiscrimination rules, including 1.401(a)(4)-5.  As Cuse said, "Accrual rules get applied to an amendment as if it had always been in effect".  

What particular rule are you concerned with?  

[NewBieHere]

I remember from EA exams a while back that, when you have a formula like ($100 for the first 10 years and $Y for the years thereafter), Y could not be greater than $133.33. to satisfy 133 1/3 Rule. I was trying to determine how what I was asking about is any different from the example here.

 

Thanks.

[Lou S.]

One is an on going formula that the IRS deems overly back loaded, the other is a fresh start amendment that is treated differently.  

But Effen's reference is what it relevant.