Update to cash balance lecture

1
Update to cash balance lecture

• Based on pages 17-20 of Securing Retirement
• Last updated November 13, 2006

2
Age Discrimination

• The Act negates the argument advanced in a number
  of lawsuits that giving equal credits to the
  hypothetical accounts of participants of
  different ages is discriminatory.
• Tradeoffs
• require hybrid plans to adopt a three-year
  vesting schedule.
• the interest crediting rate may not exceed a
  market rate of return as defined by Treasury
  regulations.

3
Plan Conversions

• each participants benefits after the conversion
  must equal the sum of the pre-conversion benefit
  under the prior plan formula and the
  post-conversion benefit under the hybrid formula.
• Effectively ends wearaway
• special conversion rule preserves the value of
  early retirement subsidies associated with
  benefits accrued under the prior formula.
• If at retirement the participant has met the
  eligibility conditions for the subsidy and elects
  a lump-sum distribution, the value of the subsidy
  must be included, even if the plan would not
  normally take it into account.

4
Whipsaw

• provides that the distribution of a participants
  hypothetical cash balance account is sufficient
  to satisfy his or her benefit entitlement
• In a cash balance plan, a participants benefit
  is communicated as a hypothetical account
  balance.
• PRIOR TO PPA, many plan sponsors assumed that a
  participant who elected a lump-sum distribution
  was entitled only to that balance.
• however, a number of courts had concluded that
  the distribution could not be less than the
  present value of the participants projected
  annuity at the plans normal retirement age.