110% test

Good morning all

I was asked to perform a 110% test for a cash balance plan and see if an HCE is eligible for lump sum. I was told the client is eager to pay the lump sum.

I have done this many times for a defined benefit plan and never needed for a cash balance plan.

As I am not 100% sure, would one of the 2 methods be acceptable?

1- simply use the account balance (no 415 issue) as of distribution date (adjusted for interest credit if required) and compare to the assets as of the same date, or;

2- determine the AB's as of distribution date and convert them to lump sum using?? PVAB would be based on plan actuarial assumptions, 430 assumptions, 417e assumptions??

Any other methods that are acceptable that I am not thinking of?

Also, do you provide the client the method to choose as sometimes one method would allow lumpsum where another would not? I remember this discussion sometime ago and some well known actuaries had no issue to let the client decide between 430 and 417e options (it was for a defined benefit plan), as long as the ramifications were well explained and disclosed to the client.

Thank you all and have a great weekend.

I would default to using the plan's target liability for funding purposes (or for 404 purposes).  Remember the 110% must be satisfied after removing the distribution from both the assets and the liabilities.

Hi Andy

Thank you for your input though never heard of 404 assumptions to be used. Always used 436 or 417e3.

Still not too clear what to do on cash balance situation.

Thank you

I think you do it as you would any other 110% calculation.  

Calculate the FT and take the participant out.

Calculate the Assets and take the LS out.

Is the Assets/FT > 110%?

Hojo, that is another way using 430 assumptions.

Thank you

Agree with Hojo, with the caveat that if the plan is not frozen you should also include 2020 target normal cost to estimate the most current liabilities in the plan. We also adjust the liability from valuation date to the estimated date of payment using the effective interest rate. 

Agree to include TNC if 1000+ hours accrued. Adjusting liability EIR is interesting as the liability is calculated on the date 110% is applied.

Thank you for your input.

One other issue regarding the cash balance plan would be, depending on the date of the calculation and the plan document, have the account balances received the appropriate interest credits to the date of the calculation before determining a FT or FT+NC.

This particular plan document provides interest credit annually and at end of year so any date before end of year will not reflect any interest credit. Good point though.