Terminating Cash Balance Plan and Crediting Interest

CBP has fixed 6% interest crediting rate and (per pre-approved plan document selection) does NOT provide interim interest to the annuity starting date. Plan terminated, effective 12/31/2025 (also PYE) and will pay out on 6/1/2026, the ASD - there is no requirement to override the plan provision and provide interim interest (5/12 of 6%), correct?

That's true even if we had to average prior 5 years of variable ICRs, yes?

I see in the basic document the averaging requirement but nothing requiring an interim credit.

Thanks

I have heard about plans that only credit annual interest, but I have always felt that would cause a 411(d)(6) violation.  I would think you would need to credit interest to the date of payment, otherwise you have a declining accrued benefit.  So, I would use the 5-year average for post 12/31/25 and credit interest to 6/1 payment date. 

Just my opinion, others may disagree.   

I re-read 1.411(b)(5)-1(e)(2) to be sure and I concur - there is nothing that would require you to use a different interest crediting period post-termination. If a full interest crediting period elapses after termination, then yes, you have to use the 5-year average of interest crediting rates as the interest crediting rate for that period. But if all distributions are completed before the end of the first interest crediting period post-termination, then no one would actually get that interest credit.

Effen, I get where you're coming from. But remember, 411(d)(6) only says you can't reduce a participant's accrued benefit by an amendment. If it's part of the formula from the get-go then 411(d)(6) doesn't apply. And there is no reduction in the participant's normal retirement benefit. All you are doing is saying that if you take a distribution on day X, your lump sum will be $Y. Now Y could be less than the actuarial equivalent of the normal retirement benefit, and that's ok. In a cash balance plan, the lump sum doesn't have to be the actuarial equivalent of the normal retirement benefit, it's actually defined the other way around - the lump sum (or any alternative form of benefit) has to be not less than the actuarial equivalent of the hypothetical account balance. Since the hypothetical account balance only gets interest credits annually, then yes, it's possible that the actuarial equivalent of the hypothetical account balance will decrease throughout the year. That's expected and again it's ok.

When it's not ok is if the participant is past normal retirement age, because then not applying the partial-year interest credit would result in an impermissible forfeiture of accrued benefits (unless the plan uses the suspension of benefits rule). So the accrued benefit does still have to be actuarially adjusted post-NRA to the date of benefit commencement. But for pre-retirement distributions, you're fine.

3 hours ago, Effen said:

plans that only credit annual interest

It's a pre-approved document provision so IRS has no issue with it.

Even if you’re confident that the documents governing the plan state no provision that could tax-disqualify the plan (and do not omit a provision needed for the plan to tax-qualify):

Consider that an IRS opinion letter on preapproved documents warns that it provides no assurance about ERISA’s title I.

If the plan is ERISA-governed, the plan’s administrator might consider whether its reading of the plan comports with all commands of ERISA’s part 2 of subtitle B of title I (ERISA §§ 201-211).

Treasury rules to interpret similar provisions of the Internal Revenue Code might be persuasive authority to support interpretations of some (not all) provisions of ERISA’s part 2. But, strictly speaking, there is no reliance on IRS-preapproved documents.

This is not advice to anyone.

"No partial year interest" is great, until it's not. 

Which is when you have to explain to the sponsor why only the post-NRA guy gets extra gain on his prior year-end "balance."  And why it's not at the plan's ICR of 4% but rather the AE of 5.5%.

As Cusefan indicated, it is available in IRS pre-approved document, at least the one I use i.e. no pro-rata interim adjustment is required is one of the options.

I researched this, checked this and confirmed with the document vendor that no interest credit is provided until 12/31 i.e. if the ASD is 12/30, no interest crediting. FYI this was based on fixed interest rate only, nothing else.

100% in agreement with Corey on the 411d6 issue as well since this was also discussed with the vendor.

FWIW

Just an FYI... I had a PBGC covered Cash Balance Plan and the PBGC agent reviewing the Plan insisted that a partial year interest credit be given to the Participants even though the Plan Language (FIS) clearly stated that interest is only credited at the end of the year.

Thank you everyone for your input. I could see interpretation here that the earlier plan termination ASD is tantamount to the last day of the plan year and therefore requires an interest credit allocation. There are some other factors (allocating excess assets up to 415 limit) in my case that make this a moot point now that I think about it.

As Emily Litella said after her diatribe on eagles' rights, "never mind."

2 hours ago, CuseFan said:

There are some other factors (allocating excess assets up to 415 limit) in my case that make this a moot point now that I think about it.

As Emily Litella said after her diatribe on eagles' rights, "never mind."

So now I'm told this was a different plan versus my original question which still remains relevant - so the $64,000 question is whether the plan termination distribution date for all benefits (the ASD) is essentially a PYE and therefore creates an Interest Credit Period under the terms of the Plan? If so, then an interest credit should be provided. Does the presence of excess assets which will be transferred after all benefits are paid make a difference? Technically the plan has not ended because assets are not zero, but there is nothing on which to credit interest so does that still create a (short) Interest Credit Period. These are relevant AA items. The BPD does not elaborate other than say that the ICR will be prorated for any ICP < 12 months.

15.   Interest Credit Period:
a.        Each Plan Year

22.   If a Participant's annuity starting date occurs before the end of an Interest Crediting Period, the Interest Credit for the partial Interest Crediting Period will be:
a.        Zero

I welcome any further thoughts or direct experience you may have had with this issue. Happy Friday afternoon for a holiday weekend!