IRS Examiners Told to Look at Cash Balance Plan Benefit Formulas

A memorandum directs Internal Revenue Service (IRS) Employee Plans (EP) staff reviewing benefit formulas in cash balance defined benefit plans to apply the analysis in an attached Issue Snapshot on Definitely Determinable Benefits.

In general, a qualified plan “within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement,” the IRS notes. 

According to the memo, for a cash balance plan, a determinations specialist reviewing a determination letter request, or an exam agent auditing a plan in which the benefit formula is not the subject of a determination letter, should follow the analysis (including examples) in the attached Issue Snapshot for determining whether a benefit formula based on only a portion of annual compensation, a special bonus, or other measure not based on annual compensation, is “definitely determinable.”

Generally, the memo says, if the terms of the plan specifically allow the employer to vary the employee’s compensation used in the benefit formula (e.g., an employee’s annual compensation less an amount designated by the employer), the plan would violate the definitely determinable rule.

The memo offers examples and would be a helpful guide for cash balance plan sponsors to assess whether their plan offers definitely determinable benefits.