National Pensions - CPA Oriented

Senior Pension Consultants

Cash Balance Pension

Cash balance plans are defined benefit plans with funding based on hypothetical rates of return in the individual accounts of the plan participants. The participants are 100% vested after 3 years. Currently there is no volume submitter or prototype documents available. Each plan must be individually approved by the IRS. Many traditional plans have been converted to cash balance so the plan sponsor does not have to pick up the additional cost of the plan as the benefits are not based on salary obtained at the end of the year. Instead benefits are based on the amount in the plans' hypothetical accounts. The IRS provided the materials on the following regarding cash balance plans:

The Bank of America adopted one of the first cash balance pension plans in 1985. On September 3, 1993, the U.S. Department of the Treasury issued final 401(a)(4) regulations (Income Tax Regulations 1.401(a)(4)). Section 401(a)(4)-8(c) of those regulations created a "Safe-Harbor" for Cash Balance plans. On January 18, 1996, Notice 96-8 was published providing for "Safe-Harbor" on interest rates for Cash Balance plans. On December 11, 2002, proposed regulations were issued providing for "Fresh-Start Rules" for Cash Balance "Conversion Plans" (these have been withdrawn - see announcement 2004-57).

In 2003, several major cash balance plans were in litigation or seeking declaratory judgments over such issues as rate of accrual and whipsaw issues and age discrimination, including Bank of Boston, Xerox, IBM, and CBS. On February 2, 2004, the U.S. Department of the Treasury issued proposed legislation for Cash Balance plans. In 2006, the Pension Protection Act was passed that eliminated ADEA claims on Cash Balance plans. Today, nearly one-third of Fortune 100 companies have adopted some form of a Cash Balance plan. A 2002 survey of firms with pension plans containing more than 1,000 participants revealed that 19% of plans were Cash Balance plans. PPA 2006 was passed to eliminate the litigation on Cash Balance Plans and allow the Treasury to make rules allowing these plans.

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