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Cash balance & hybrid plans final & proposed reg

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A brief overview of cash balance and hybrid plans. New regulations and issues.

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Cash balance & hybrid plans final & proposed reg

  1. 1. Cash Balance & Hybrid Plans Final & Proposed Regulations Minneapolis Pension Council October 16, 2014
  2. 2. Outline ƒ Brief cash balance overview ƒ What’s new in the regulations ƒ Surprises ƒ Issues & answers 1
  3. 3. Overview: What a Cash Balance Plan Is ƒ It’s a DB plan that looks like a DC plan ƒ Big DB deductions, DC-like simplicity 2
  4. 4. Overview: Cash Balance Plan Example DB/DC combo ƒ Common for professional firms ƒ Enables large deductible contributions for owners
  5. 5. Overview: Cash Balance Plan Example DB/DC combo: cash balance & profit sharing { This example is for a PBGC-covered plan, Frankenstein Mfg. Inc. { Gateway here is 7½% DC; Igor & Inga get 3% cash balance credits { A PBGC-exempt professional firm may need to limit DC er contrs to 6% Age 2014 Pay Cash Balance Credit PS & 3% Safe Harbor 401(k) & Catchup Total Dr. F’stein 60 $260,000 $230,000 $34,500 $23,000 $287,500 Igor 40 50,000 1,500 3,750 whatever 5,250+401k Inga 30 30,000 900 2,250 whatever 3,150+401k
  6. 6. Overview: Cash Balance Buildup Pay Credits + Interest Credits = Cash Balance! 5 Year Pay Credit Interest Credit @ 10% Cash Balance 1 $100,000 $0 $100,000 2 100,000 10,000 210,000 3 100,000 21,000 331,000 4 100,000 33,100 464,100 5 100,000 46,410 610,510 6 100,000 61,051 771,561 7 100,000 77,156 948,717 8 100,000 94,872 1,143,589 9 100,000 114,359 1,357,948 10 100,000 135,795 1,593,742
  7. 7. Overview: PPA “Statutory Hybrid Plan” 6 Definition DB plan where portion of accumulated benefit is: „ Current hypothetical account balance (cash balance plan); or „ Accumulated percentage of final average pay (PEP plan) What you get „ Whipsaw relief „ Age-discrimination relief What you give „ 100% vesting in 3 years „ Interest credit can’t exceed “market rate of return”
  8. 8. What’s New: Final & Proposed Regs ƒ Effective for plan years starting in 2016 ƒ Applies to statutory hybrid plans ƒ Changes to allowable “market” interest credits ƒ §411(d)(6) relief for noncompliant interest rates ƒ Different interest credits for different groups! ƒ Interest credits after plan termination 7
  9. 9. What’s New: “Market” Interest Credits 8 Type of Rate Comments Old (2010) Maximum Floor New (2014+) Maximum Floor Fixed 5% 6% Actual return on assets May now be based on a subset of trust 3% cumulative 3% cumulative Mutual fund or annuity contract Broad US or int’l market fund 3% cumulative 3% cumulative Notice 96-8 Treasury From 3-month + 175 bp to 30-year + 0 bp 4% annual or 3% cumulative 5% annual or 3% cumulative Segment rates 417(e) lump sum or 430(h) funding 4% annual or 3% cumulative 4% annual or 3% cumulative CPI Plus 0-300 bp 4% annual or 3% cumulative 5% annual or 3% cumulative Other Only as announced by Commissioner!!
  10. 10. What’s New: §411(d)(6) Relief ƒ Anti-cutback rules: each pay credit includes all future interest credits ƒ So, couldn’t reduce future interest credits ƒ Except to comply with new rules ƒ For example: 3½% cumulative floor could be reduced to 3% going forward ƒ Option to preserve pre-amendment balance with old (noncompliant) interest credits 9
  11. 11. What’s New: Interest Credits by Group ƒ Interest credit = actual return on subset of assets ƒ Can now set up CB plan like a target date fund ƒ Asset pool requirements ƒ Diversified ƒ Employer stock & real estate < 10% of pool ƒ Market value of pool =~ benefits (account balances) 10
  12. 12. What’s New: After Plan Termination ƒ PPA: post-plan-termination interest crediting rates equal 5-year pre-termination average ƒ For a market-based plan, PPA rule produced odd results at the end of a bull or bear market ƒ May now use PPA 2nd (middle) funding segment rate for the last pre-termination month 11
  13. 13. Surprises ƒ Different interest credits for different groups ƒ 3% cumulative floor < 4% - 5% annual floor ƒ Specified rates only! ƒ §411(d)(6) relief for future interest credits 12
  14. 14. Issues: Interest Credits by Group ƒ This will expand the appeal of cash balance plans ƒ Need to ensure that it’s nondiscriminatory ƒ Will need to track participants through different asset pools and crediting rates ƒ It will be a recordkeeping and testing challenge, but worth it 13
  15. 15. Issues: Maximum 3% Cumulative Floor ƒ Could demonstrate that it’s always <= 3% annual ƒ And 3% annual < permitted 4% - 5% annual ƒ Or...use §411(d)(6) relief to reduce floor > 3% 14
  16. 16. Recap ƒ Brief cash balance overview ƒ What’s new in the regulations ƒ Surprises ƒ Issues & answers ƒ Questions? 15
  17. 17. 16 Contact Information Mark Schulte, FSA, EA, MAAA marks@vaniwaarden.com 612.596.5971 Jim van Iwaarden, FSA, EA, MAAA jimvi@vaniwaarden.com 612.596.5961 Van Iwaarden Associates 840 Lumber Exchange 10 South Fifth Street Minneapolis, MN 55402 www.vaniwaarden.com 1.888.596.5960

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