Ferguson & Finnegan Discuss Testing Issues Specific to Cash Balance Plans

| June 11, 2012 | 0 Comments

ASPPA News from the Field
ACOPA Advanced Actuarial Conference

Boston, MA, (June 4, 2012) – The ASPPA College of Pension Actuaries (ACOPA) held its Advanced Actuarial Conference in Boston June 4-5. The conference provides an opportunity for attendees to learn from various actuarial, legal and accounting experts in addition to networking with professionals working in the pension field.

Andrew Ferguson, Consultant with Altman & Cronin Benefit Consultants, LLC in San Francisco, and Tom Finnegan, Principal with The Savitz Organization, Inc. in Philadelphia led a workshop on Cash Balance Plan testing issues. Their presentation included background on non-discrimination testing and cash balance plans, walked through specific non-discrimination testing examples, and provided practitioners with ways to deal with non-discrimination testing failures.

This was an important workshop because retirement plans have to show they are not discriminating in favor of highly compensated employees (HCEs). Finnegan said there were two methods for retirement plans to do this; either by way of a “safe harbor” or by using numerical testing. They focused on numerical testing in their presentation.

Finnegan then went on to provide background on  cash balance plans. He explained that they are defined benefit plans where the benefit is a “notional” account that includes both “contribution credits” and “interest credits”. For example, let’s say a cash  balance plan is set up to provide contribution credits equal to 5% of pay. Then, if a participant in the plan earns $100,000 during the year, that participant will receive a contribution credit equal to 5% of $100,000 or $5,000. In the first year of the plan, this $5,000 contribution credit represents the participant’s “notional” account balance at the end of the year. In future years, the participant’s account balance will accumulate interest credits (based on the interest rate defined in the plan document) in addition to any future contribution credits they are entitled to receive from the plan.

Finnegan and Ferguson then discussed how to calculate normal accrual rates and most valuable accrual rates by using a number of different examples. In addition, they discussed the Average Benefits Test, Minimum Allocation Gateways, and Section 401(a)(26) coverage testing. They also hit on the Section 404(a)(7) combined plan deduction limits and showed how testing is impacted when you use different normal retirement ages (62 versus 65).

To close the workshop, Ferguson provided a number of testing techniques that can be used to handle testing failures. In addition, he ranked the measures necessary to correct the testing failures on a scale from least painful to most painful from the client’s perspective.

Non-discrimination testing for retirement plans is complicated, but Mr. Ferguson and Mr. Finnegan did a good job laying out the basics of testing, teaching attendees how to do some of the calculations involved, and finally providing ways to try and correct any testing failures that come up.

Jeremy Palm
Retirement Plan Consultant
Lurie Besikof Lapidus & Co., LLP
ASPPA Benefits Council Twin Cities


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