10/18/2016. Cash Balance Plans for DC Administrators. Workshop 67

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Catherine Simpson
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1 Cash Balance Plans for DC Administrators Workshop 67 1

2 Learning Objectives How cash balance plans are like 401(k) plans; Why employers might like having a cash balance plan in addition to a 401(k) plan; and How to communicate to a client when they sponsor both types of plans How cash balance plans are like 401(k) plans 2

3 How CB Plans are Like 401(k) Plans Cash balance plans walk and talk like a defined contribution plan, but they are defined benefit plans. How CB Plans are Like 401(k) Plans Benefits expressed in terms of an account instead of an annuity Account is credited with a contribution credit and interest credit Classes like a new comparability plan but hardcoded in the plan document 3

4 How CB Plans are Different than 401(k) Plans Benefit level and interest credit specified in plan document Actuarially calculated required contributions Trustee directed Distribution Restrictions (AFTAP, Top 25) How CB Plans are Different than 401(k) Plans PBGC Coverage J&S rules No hardship distributions No in-service distributions 4

5 Why employers might like having a cash balance plan in addition to a 401(k) plan Why a cash balance plan? Same reason as a traditional defined benefit plan: Allows additional tax for owners or other HCEs Opportunity for older business owners to save significant amounts for retirement More deferral on lower compensation In some states, savings on state income tax for the business 5

6 Why a cash balance plan? Why cash balance plan instead of traditional db? Easier to understand funding requirements Easier to understand funded status Why a cash balance plan? Why pair a cash balance plan with a 401(k) plan? Additional funding flexibility Keep portion of the deferral participant directed Testing leverage 6

7 How to communicate to a client when they sponsor both types of plans Communicating Cash Balance Plans Put yourself in the client s shoes Sometimes less is more Laser-like focus on what client needs to know De-emphasize flexibility 7

8 Communicating Cash Balance Plans Example: Annual Funding Notice Approach 1 Please distribute the Annual Funding Notice to cash balance plan participants by July 31, The AFN contains the funding target for the last three years as well as an updated calculation of the funding target as of the end of the prior plan year. Additionally, the AFN is required to include information about the minimum required contribution if MAP-21 and HATFA were not applied. Communicating Cash Balance Plans Example: Annual Funding Notice (cont) Approach 2 Please distribute the attached legally required notice to all cash balance plan participants by July 31, Across our book of business, we generally receive no participant questions on this notice. But, if your participants have questions, please let us know and we will help you answer the questions. 8

9 Communicating Cash Balance Plans Example: Annual Funding Notice (cont) Which approach is more likely to confuse the employer? Which approach is more likely to drag you into rabbit holes that eat up a lot of time? How do you explain SARs or 404a-5 notices? Let s Vote! (And, it is not rigged ) 9

10 Vote # 1 How much should I contribute? What is the contribution deadline? How much should I contribute? After the first year, the range between the minimum required contribution and the maximum tax deductible can be crazy large. You have to anticipate this question. 10

11 What is the contribution deadline? The earlier of 8 ½ months after the end of the plan year and your company s fully extended tax filing deadline. Vote # 2 I just want to have the cash balance plan for two years. Okay? Why are cash balance fees higher than 401(k) fees? 11

12 I just want to have the cash balance plan for two years. Okay? Why would you want this client? Permanence requirement Why are cash balance fees higher than 401(k) fees? Note to audience: For anti-trust reasons, we cannot discuss actual fees or anything that would give the impression that we are engaging in anti-competitive behavior. So, let s not go there! 12

13 Why are cash balance fees higher than 401(k) fees? If you are comfortable and unembarrassed talking about fees, things will go better. Combined plan testing Actuarial calculations Vote # 3 I don t want PBGC insurance. Can I opt out of PBGC coverage? What in the heck is an AFTAP? 13

14 I don t want PBGC insurance. Can I opt out of PBGC coverage? It is statutory you are either in or out. There is no choice. What in the heck is an AFTAP? Measure of the plan s funded status. If it falls below certain levels, lump sum and other restrictions may apply. 14

15 Vote # 4 Why can t my retiring partner get a lump sum? Why can t I put the maximum deductible contribution in? Why can t my retiring partner get a lump sum? AFTAP Rules Top 25 Rules 15

16 Why can t I put the maximum deductible contribution in? You can put the maximum deductible limit in, but we recommend against it. There are two sets of rules at work that have different policy purposes. IRC Section 415 limit Maximum deductible limits Why can t I put the maximum deductible contribution in? Yes, I agree that it does not make sense that you can put more in than you can get out. That is our Congress at work. 16

17 Vote # 5 What happens if I can t make the required contribution? Why are my PBGC premiums so high? What happens if I can t make the required contribution? Obligation does not go away Excise tax Notice to PBGC 17

18 Why are my PBGC premiums so high? Interest rates are low Premium rates are increasing Audience Wildcards!! 18

Workshop 10: Other Cash Balance Issues

1 Workshop 10: Other Cash Balance Issues Kevin J. Donovan, CPA, EA, MSPA, FCA Pinnacle Plan Design LLC Andrew W. Ferguson, FSA, EA, FCA, MSPA, MAAA Altman & Cronin Benefit Consultants, LLC 2 1. Background