A Peek at a Pre-Approved Cash Balance Plan Submission

The Internal Revenue Service (IRS) has expanded its pre-approved plans program to include defined benefit plans with cash balance plan features, and it is currently accepting prototype document submissions.

James E. Turpin, president of The Turpin Consulting Group, said he has seen one of the submitted prototype documents, and he shared a few features with attendees of the American Retirement Association’s 2015 ASPPA Annual Conference.

“If dealing with a uniform plan design, I haven’t seen any problem with the prototype,” he said. However, he is concerned with an open box for plan sponsors to input their plan’s interest crediting rate.

Interest crediting rates are highly regulated, and rates outside of the IRS’ approved list cannot be used in cash balance plans. “If the document doesn’t use a list of approved rates, with a box for the plan sponsor to check beside the one it is using, I think it would be hard to depend on the reliance of the IRS approval letter,” Turpin said.

He also noted some new rules included in the listing of required modifications (LRM) for cash balance plans that plan sponsors will see in the new documents. For example, interest credits on participants’ notional accounts can be done quarterly, monthly, or more often.

Some cash balance plan sponsors, upon conversion from a traditional defined benefit (DB) plan, established a beginning balance for the cash balance plan that was based on the accrued benefit in the traditional DB discounted for present value. This resulted in a period of time—called “wear-away”—during which new accruals would not increase the benefit to which a participant was already entitled. Turpin said no “wear-away” formulas are allowed now.

Finally, Turpin noted that there is no requirement that plan sponsors have to limit contribution credits to participants’ notional accounts to the IRS 415 maximum annual addition limit.