What to do with large investment returns in a Cash Balance Plan

We are the actuary for a cash balance plan that uses the actual rate of return for plan assets as the annual interest credit.  The interest credit percentage is limited to 6%.  The Plan had an asset return of 21% for the 2020 plan year.  As a result, the assets exceed the participant account balances by a considerable amount.

Any suggestions on how to use these extra assets for the participants?

Can we have an ad-hoc interest credit or pay credit to bring the account balances up to the assets?  I want to make sure we do not violate the accrual rules or discrimination testing.

Any suggestions would be appreciated.

Anything you do that increases benefits will have to satisfy nondiscrimination.

You don't describe any of the circumstances that we would consider in dealing with this - amount/percentage of over funded status, number and ages of owners, if owner benefits are tracking at 415 limits, the relative number of employees/participants, how mature the plan is and whether the plan is aggregated with a DCP to pass testing or you have combined plan deduction limits that apply.

A joint discussion with the plan sponsor and investment advisor is warranted because a 21% return sounds great but at what risk and, if owner benefits are at or near 415, why construct the portfolio in that manner? This is a much different discussion if you have a $10M plan that just created $1.5M in excess versus a $1M plan that created $150,000 in excess.

Again, depending on particular circumstances, we usually recommend a number of alternatives, sometimes individually and sometimes in combination, including reducing future contributions, amending to increase benefits (usually a one-time balance increase, and possibly reducing contribution to CBP to offset additional PS contributions that are often needed to satisfy testing), paying eligible plan expenses from plan assets, and retaining a cushion for various reasons such as the 110% threshold to pay HCE lump sums or protecting against a down year in the business or the market (although ROR ICR does that for most part).

This is a good problem to have but the key is to not let the over funded position get out of control - but what constitutes out of control depends on the particulars surrounding the plan.

Good luck.