Converting a DB Plan into a Cash Balance Plan

Good afternoon everyone, I hope all is well.  I have a new client that has a traditional DB Plan that started in '21.  They want to convert that into a Cash Balance Plan.

Is there a way to simply restate the Plan (which we need to do anyway) and convert it into a CB?  Or do we need to terminate and start a new plan?

I know the FT William cash balance document has a spot to say that it is a conversion from a traditional DB. Check your document; it may have a similar option.

6 minutes ago, C. B. Zeller said:

I know the FT William cash balance document has a spot to say that it is a conversion from a traditional DB. Check your document; it may have a similar option.

Thanks!  So it would really be just restating the document converting it?  Just wanted to make sure there wasn't any other steps

I think there are some complexities with converting traditional DB to cash balance and if you are using a pre-approved document you may want to read the fine print on whether or not your opinion letter covers the conversion. But like FTW, Relius Doc also has a spot in the checklist to convert from DB to CB.

You might also want to double check with your software that it is able to handle the conversion from DB to CB. Not that that is an IRS code requirement, but something you might want to know before you take on the client.

if you follow the simpliest way to convert (bypssing all bells and whistles) it should pretty straightforward.  In the worst case you would just feed into the system the Opening Balance (even if it has be calculated outside in the spreadsheet) and move forward.  I think Datair Plan Documnt system also allows for conversion.

I have not done one but,

Datair has the capabilities of the conversion. Keep in mind that A+B method should be used where is the converted opening balance and B is the additional pay credit.

FTW document supports this as well.

Fundamental point: a cash balance plan is NOT a type of plan (ala DB, PS, MP), it is a type of DB formula.  Thus, you have a DB plan where you are going to change the formula.  It is not a plan termination, just a type of formula change.

I am in the same situation but have a different question. How does one determine the pay credit when we switch from a traditional DB plan to a cash balance plan? I am asking the question in the context of accrual rules. For example, in a traditional DB plan, the accrual has to satisfy one of the three:  133 1/3, fractional, and 3%. 

Since the pay credit is the benefit accrual for the year, does it have to follow one of these rules when the A.E. of the pay credit is compared to the accrual rate that existed in the traditional DB plan?

Or, we simply convert the froze accrued benefit as of the fresh start date into an opening balance and set the pay credit based on the nondiscrimination testing results like we do when we first design the plan?

Thanks!

Typically it is done with a fresh start.

Isn't fresh start a law for conversions?

Hi Lou S. and Jakyasar,

Yes. I understand about the Fresh Start. My question is that, with the fresh start, can you set the pay credit as high as possible as long as the pay credit passes the nondiscrimination testing? I suppose Fresh Start means that you are literally starting over from the beginning. 

I need to know, in the event of converting to a cash balance plan, that the A.E. of pay credit is limited by 133 1/3% of the accrual under the DB plan. Larry Starr says that a cash balance plan is a type of formula. So, I would think it needs to abide by one of the accrual rules, namely 133 1/3.

Yeah that's how it works.  You fresh start it and use the 133 1/3 accrual rule going forward.

Cash Balance Formula ususally relies on 133 1/3% rule, I do not belive I have seen anything else for small plans.   It is only the "large" plans when you are trying to design pay credits based on age/service/points will ocasionally fail 133 1/3 rule.

Lou S. and truphao,

So, if a traditional DB plan currently has 7.5% of High-3, after the conversion, does the pay credit has to be no more than 10% (4/3 of 7.5%)  when converted to an annuity at NRA?