The document summarizes new regulations for cash balance and hybrid pension plans from a presentation given on October 16, 2014. Key points include:
- The regulations allow different interest crediting rates for different participant groups, tracking returns on subsets of plan assets.
- A new cumulative 3% floor replaces the previous annual 4-5% floor for determining minimum interest credits.
- Plans have relief to reduce future interest credits to comply with the new rules through a §411(d)(6) provision.
- Other changes address determining interest credits after plan termination and expanded opportunities for cash balance plans. Issues around nondiscrimination testing and recordkeeping with different crediting rates were discussed.
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Cash balance & hybrid plans final & proposed reg
1. Cash Balance & Hybrid Plans
Final & Proposed Regulations
Minneapolis Pension Council
October 16, 2014
2. Outline
ƒ Brief cash balance overview
ƒ What’s new in the regulations
ƒ Surprises
ƒ Issues & answers
1
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. Overview: Cash Balance Plan Example
DB/DC combo
ƒ Common for professional firms
ƒ Enables large deductible contributions for owners
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
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. 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. 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. 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. 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. 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. 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. 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. 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. Recap
ƒ Brief cash balance overview
ƒ What’s new in the regulations
ƒ Surprises
ƒ Issues & answers
ƒ Questions?
15
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