Cross Testing a Cash Balance Plan

I was hoping someone could explain how the Most Valuable Allocation Rate is developed when cross testing a cash balance plan.

For the Normal Allocation Rate, I projected the cash balance to retirement age using the interest crediting rate of 2.80% (30-yr treasury rate) and then converted to a life annuity using the Plan’s Actuarial Equivalence (also 2.80% and the 2017 applicable mortality table (post-retirement only). I then converted this benefit accrual to a lump sum using the standard interest and mortality table (8.50% and UP1984) and then discounted it to their current age at 8.50%. This amount is divided by testing compensation to determine the Normal Equivalent Allocation Rate.

Now because this plan pays immediate lumps sums, I am getting conflicting directions on how the most valuable equivalent allocation rate should be determined.

Any help would be appreciated.

Can't speak for others, but this is what we do:

(CB account / immediate QJSA factor (plan AE) * immediate QJSA (standard factor 8.5/up84) * (1.085) ^ (RA-aa) ) / LO@RA standard factor 8.5/up84 - this would be your AB for testing.

We test everything at Expected RA, so we wouldn't discount back to AA. 

Actually, I don't know why you would be discounting back to attained age - that doesn't feel right to me, but I know there are a lot of ways to do the test.

The Most Valuable has to be tested at every age.  It just so happens that as long as the plan's actuarial equivalence is more generous than the standard rates (which will happen almost all of the time), it is a waste of time to do the MVAR calculations at any time other than the end of the timeframe (or beginning, depending on what end you think one should start at).

What Effen described would be the testing of a Cash Balance plan on a benefit basis. It seems that original question is about the testing of a DB plan on a contribution basis. Therefore:

{CB account / immediate QJSA factor (plan AE) * immediate QJSA (standard factor 8.5/up84) / testing compensation} > (normal rate)

should give you the most valuable rate

Just  curious, but what type of situations would you test the cash balance on a contributions basis?  Are there any advantages or special situations where it is common?

We are in a situation where the owner/HCE is much younger than his employees/NHCEs.  We usually always test on a benefits basis because the roles are reversed, but in this case testing on a contribution basis should work better.

2 hours ago, Calavera said:

What Effen described would be the testing of a Cash Balance plan on a benefit basis. It seems that original question is about the testing of a DB plan on a contribution basis. Therefore:

{CB account / immediate QJSA factor (plan AE) * immediate QJSA (standard factor 8.5/up84) / testing compensation} > (normal rate)

should give you the most valuable rate

Thanks Calavera, 

Is there any notice, Q&A or regs (etc.) that verify this approach?  This makes sense to me, but I am having trouble confirming.

I assume if I want to test on a current year allocation basis, I can simply replace the CB account in your equation with the current year CB contribution amount?

Thanks

2 hours ago, mdmoose4 said:

I assume if I want to test on a current year allocation basis, I can simply replace the CB account in your equation with the current year CB contribution amount?

Yes

3 hours ago, mdmoose4 said:

Is there any notice, Q&A or regs (etc.) that verify this approach?  This makes sense to me, but I am having trouble confirming.

I am not aware of anything regarding the testing on a contribution basis. The testing on a benefit basis described in many materials. So from that perspective, the approach for testing on a contribution basis makes sense.