Below are some computations that are intended to apply some fundamentals related to cash balance plans as compared to traditional plan:

NRA is 62
pre ret act equiv is 5.5%
a62 = 12 using 5.5% and app mort

above applies to traditional plan and cash balance plan

cash balance interest credit of 5% per year
cash balance plan AB is life annuity at age 62
cash balance plan provides lump sum equal to account balance (subject to 415)

say we have an HCE who earns 200,000 and is age 45.

say under traditional plan his AB after 1st year of participation is 19,500 (i.e. 415 limit)

therefore 415 lump sum = 19,500 * v^17 * a62

= 19,500 * (1.055)^(-17) * 12

= 94,172


say under cash balance plan they give him a credit of 94,172

so cash bal AB after one year is:

= 94,172 * (1.05)^(17)/a62

= 17,969

so in other words under the cash balance plan the accrued benefit is only 17,969 v. traditional plan of 19,500, however the cash balance account value of 94,172 does not exceed 415 lump sum and could be distributed if he were to terminate at end of first year of participation.

And for non discrimination testing:

under traditional plan his accrual rate is 19,500/200,000 or 9.75%

and under cash balance plan accrual rate is 17,969/200,000 = 8.99%

are the basic principles of cash balance plan 415 limits, accrued benefits and non discrimination testing being applied correctly?

Of course I do not address the funding calculations under 430 in this analysis.

thanks

I had a whole reply setup about AE with 415 until I reread what you said about the A62 @ 5.5% = 12. The power of rereading I guess. I think you have it correctly.

Under a traditional plan with assumption 100% retirement at age 62, 415 lump sum for valuation purposes will be:
19,500 * v^17 * a62, where v is based on an appropriate valuation segment rate and not 5.5%.

For purposes of actual payout the 415 lump sum is calculated as the present value of immediate benefits and not deferred benefits. So it will be 195,000 reduced for participation less than 10 years, reduced for payment before age 62, multiplied by an immediate factor. In your example for age 45 it will be 6,526 x 15.86 = 103,502.

Note that credit is usually given at the end of the year, so the person will be age 46, and you will project his account for 16 years.

I don't think that valuation segment rates have nothing to do with the 415 limit. You would use 5.5% when determining the benefit. Valuation segment rates are used only for funding. They aren't even used for lump sum minimum under 417(e).

Also, I don't think that 415 has any rules that say you have to use an immediate lump sum amount. I think you have to look at the document. If the document allows an immediate annuity, then I think you would use the immediate lump sum factor. If it does not, than I think the deferred would make more sense. I think both of our methods would be correct without a plan but in my expirience with Cash Balance Plans, they don't allow for an early retirement benefit. Which is why I agree with the original calculation.

You did get me thinking, I went and looked at the regulation and I don't think it states you need to use an immediate. I did find that example one of the regs for 415 was close. It uses the immediate but says "Plan A provides a single-sum distribution determined as the actuarial present value of the straight life annuity payable at the actual retirement date."

Original email mentioned fundamentals and since in my opinion the following is incorrect:
"therefore 415 lump sum = 19,500 * v^17 * a62 = 19,500 * (1.055)^(-17) * 12 = 94,172"
I indicated what I think it should be for funding purposes and for payout purposes.



You would look at the document to determine the Plan's lump sum. Then, under 415 regs, you need to convert it to the annual amount of the straight life annuity commencing at the annuity starting date, which IMHO is a lump sum date, and not a deferred date. Therefore you will use an immediate factor. Following the regs example, you will calculate the Plan's lump sum, then convert it to the three life annuities, then take the maximum of those three annuities, and then you should compare it to the 415 allowable life annuity payment at the commencement date.

Reading it that way I agree with your logic. My thoughts were for non-discrimination and lump sums. For testing and actual lumps sums, I think you need to use 5.5 and not segment rates. When I hear accrual, I think of the actual benefit.

I think we'll just have to agree to disagree on the 415 lump sum. If someone can't take an immediate annuity, IMHO they shouldn't be able to have a lump sum based on that form of payment.

In order to be offered a lump sum, the participant must waive an annuity form of payment (QJSA) that would commence sometime during the 180 days after a notice is given regarding their benefit election.

Thus, if a lump sum benefit is an option, an annuity MUST also be an option. Otherwise, you cannot obtain the appropriate waiver of the QJSA needed to allow the lump sum in the first place. IMO.

You're absolutely correct, an annuity is always available.

In this case the AE for pre ret is 5.5% though so the immediate is equivalent to the deferred. I'm still sticking by my original point, that in my humble opinion, that I believe that the original post was correct.

I did enjoy the discussion on AE though for 415. It opened up my eyes. The traditionals we design use 5.5% for AE. In that world, I believe my way of thinking has been correct. Use a deferred lump sum, and then convert that into a current annuity but I should really be converting to an current annuity and then using an immediate lump sum. If the AE had been 5%, I think you are correct.

That being said, this opens up a whole different can of worms. I guess when designing a traditional to maximize a benefit, it is more advantageous to use a 5% for actuarial equivalence than a 5.5% if you expect that participant to retire before NRA. The difference becomes less and less an issue the older a participant becomes. Also, if the plan crosses over to late retirement I believe that 5.5% is the greater lump sum. This though, is a different topic and would require a different thread, and I won't open that discussion up.