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Defined Benefit Plan Design: Details Matter

The finer points of administering a cash balance plan and working with equivalent benefit accrual rates were the topics of discussion at an Oct. 27 session of the 2014 ASPPA Annual Conference. Lawrence Deutsch, president of Larry Deutsch Enterprises, and Michael B. Preston of Preston Actuarial Services offered their insights.

Remember that with simple cash balance plans:

  • there are two features: pay credit and interest credit;
  • the benefits must satisfy Section 401(a)(4); 
  • the plan must satisfy Sections 401(a)(26) and 410(b); and
  • if they are top heavy, they must include a top heavy minimum.

Regarding hypothetical interest rates, a major concern is what happens if the actual return on assets is higher or lower than such a rate. Deutsch cautioned that the “whole design falls apart if the interest rate falls to 0%.”

A somewhat unexplored solution to difficulties regarding hypothetical interest rates is to use different rates for HCEs and NHCEs. “I don’t see any reason why this is not perfectly viable,” said Deutsch.

Deutsch also argued against high interest crediting rates, calling them a way to lower benefits for NHCEs and, given a fixed budget, shift benefits from short-service to long-service employees. “If employees knew what’s good for them, they should despise high interest crediting rates,” he remarked.

Another alternative, Deutsch and Preston said, is for a plan to primarily have a defined benefit plan nature. This works better with larger groups, and if there are HCEs excluded from the plan.

And there are some who consider the traditional 401(a)(26) special plan design to be the best option. When doing so, they suggest considering a July 31 plan year end to ensure that closeout can be done before accrual for the year. And remember when designing a plan that defined contribution plans are subject to the “use it or lose it” rule, while DB plans are not.