Just got a takeover plan (cash-balance) and the benefit formula only gives a pay credit "if the Participant remained in the Employer's employ through the last day of the Plan Year".

Can a cash-balance plan have a last day requirement ? I didn't think they could but maybe I'm missing something.

Does the plan document have a determination letter that covers that language? If so, well, . . .

Otherwise, I do not think it is an allowable accrual requirement.

I don't believe a general last day rule is allowed in any DB plan, including a cash balance plan. See DOL Reg 2530.204-2c and IRC 411(b)(4). However, I believe you can have a last day rule for those with less than 1000 hrs (but not for anyone with 1000 hrs or more).

I think some plans have tried to get around this requirement by making a distinction between "benefit accrual service" and benefit accrual - clearly I think this is on very shaky ground since it amounts to the same as a last day requirement.

Whether they have an IRS determination letter or not does not make the plan safe, since these are ERISA rules. All it would take is one complaint to the DOL and they would probably look into it . . .

I started a long post on this subject a few months ago because I had the same issue - takeover plan. It is not uncommon to have a last day requirement, but I agree it is not allowable if a participant has 1000+ hours.

The Cash Balance Answer Book, for example, says it is permitted (or at least it did then). There is a lot of misinformation on this subject.

I agree with John and David's comments.

I also thought that Relius' document permitted it, but someone pointed out correctly that if you read it carefully it does not.

If your plan has this rule, then the excluded participants did not earn a benefit under the terms of the plan. Now the consequences are that you have some excluded employees who must be covered in the testing. So you have 410(b) and 401(a)(4) issues.
But much more important are the 411 rules for accrual of benefits. You do have the ability to choose "elapsed time" rules for credited service, and those rules are similar in concept to the last-day rules.

Frankly, I just would not touch this issue. 1,000 hours = year of accrual seems like the logical choice to me.

They do have an IRS determination letter on the plan. They use 1000 hours for initial eligibility but for the plan benefit formula there is no apparent hours of service requirement, just the last day requirement, almost a "de facto" elapsed time approach, though no specific elapsed time definition is mentioned.

Shouldn't partial service be credited under the elapsed time rule?