Impact of PPA

A consultant suggested the PPA effectively repealed IRS Notice 96-8, at least to the extent the notice said future interest credits are part of the benefits that are already accrued.  He says under the PPA the cash balance is the accrued benefit.  But if what he is suggesting is correct, could that mean you could reduce the interest credits on benefits that have already accrued?  That doesn't seem right.  Am I mixing apples and oranges here?  

No, you can't.

Is Notice 96-8 still good law, or was it repealed, overruled, or modified by PPA?

I think the most accurate answer to such a broad question is: a little of each.

I guess what I am asking is did the PPA allow cash balance plans to have a rate of accrual in a future year that exceeds the current year accrual by more than 33-1/3%?  I don't see that it did.  

Cash balance plans are subject to the same anti-backloading accrual rules as other defined benefit plans.

Thank you Mike.  Your answers have resolved my issues.  

It is my understanding that, when measuring whether a cash balance plan meets ERISA's accrual rules, one is either measuring the amount expected to be added to the hypothetical account for any future year versus the amount to be added to the account now  (or any earlier future year) or the monthly life annuity payable at NRA that will be attributable to the addition to the hypothetical account for any future year versus the like amount to be added now (or any earlier future year).  If performing the latter comparison, one must assume interest on the account from the year of addition to NRA consistent with the plan provisions.

The former comparison would work perfectly well for a cash balance plan with a constant annual percentage of pay addition (i.e., the pay credit is always 5% of the year's earnings).  The latter must be used if the pay credit percentage goes up with service (i.e., 5% for each of the first 10 years, then 6% for the next 10 and 7% for years over 20, and the future interest credits on the 5% pay credits must be sufficient to make the monthly life annuity accruals at NRA big enough to not leave any of the accruals from the 7% credits at NRA above 133 1/3% of the accruals from the 5% pay credits).

I see no justification for the former, what 411 rule are you following? OTOH, I can't imagiine a flat percentage of pay failing the latter.

If a cash balance plan's pay credit is a flat 5% of each year's pay, any way you approach it, that plan will pass the 133 1/3% accrual rule.  Consider it a special case of the latter approach I mentioned.

In years past, I have seen pay credit formulas rising from 3% for the first few years of service to 15% for years over 30 or 35 (a ratio of 500%!).  With a 6%+ minimum interest credit (as was provided under that plan), the 3% pay credit for years 1-5 would accumulate to be within 33 1/3% of the benefit produced by the 15% pay credit for years over 30 (3% X 1.06^25 X 1.3333 > 15%).  That is how something that intuitively looks like it couldn't possibly pass the 133 1/3% accrual rule actually does (of course, there have to be gradual intervening increases from 3% up to 15%).  One really wouldn't bother to worry about whether a flat pay credit formula would pass the accrual testing.

Of course, that plan's provisions predated the market rate requirements imposed under PPA, so 6% was perfectly fine for an interest credit rate.

None of which addresses your original statement, which appears to be based on.... what? Your entire subsequent post addresses the 133 and 1/3 rule with which I have not a quibble.

1 hour ago, Mike Preston said:

None of which addresses your original statement, which appears to be based on.... what? Your entire subsequent post addresses the 133 and 1/3 rule with which I have not a quibble.

OK - when measuring whether a cash balance plan meets the 133 and 1/3 rule (generally the one to go with when assessing whether the plan meets the accrual requirements of ERISA), measure the monthly life annuity expected to be provided at NRA by each year's pay credit, with interest credits assumed for every future year based on the plan provisions (using the current year's rate if it's variable - and please don't ask me how to handle a market loss when tying the interest credit to actual investment performance, since I had no experience with such things).  Feel free to ignore what I said earlier about considering the amount of the pay credit if it confused the issue.  My comments with regard to a flat pay credit may have just represented a shortcut, not explicit in the law or regulations.

Accrual of interest on the current balance in every future year is part of the "accrued benefit" even in cash balance plans defining the accrued benefit as the current balance.  Participants are always entitled to future interest credits, and I go along with the idea that the plan cannot be amended to reduce the rate of future interest credits (except as permitted by the regulations when the interest crediting rate must be modified to meet the regulations, which is, I believe, something that had to have been done already). 

All of which relates to what has been previously described as the "latter" and with which I do not have a quibble. Thank you for clarifying the part I was quibbling with.