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December 2011 =
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bsp; =
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Volume
28 - Number 3 |
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This newsletter is addressed to our clients, their attorneys,
accountants and other professional advisors. Citations may be included fo=
r those
who want to refer directly to the source material. IN THIS ISSUE: INTERIM VALUATIONS – What Should Be Taken Into Consideration=
? - Because of the recent volatil=
ity in
the stock market, many plan sponsors are wondering if they should conduct=
an
interim valuation of their plan assets. =
CASH BALANCE / HYBRID PENSION=
PLAN
- A cash bal=
ance
pension plan is a hybrid because it’s a defined benefit pension pla=
n,
but the participant’s benefit is expressed as a theoretical account
balance. INCREASE IN USER FEES FOR DETERMINATION LETTERS - IRS has increased the fees ap=
plicable
to determination letters for individually designed plans INTERIM VALUATI=
ONS
– What Should Be Taken Into Consideration? Because of the recent volatility in the stock market, =
many
plan sponsors are wondering if they should conduct an interim valuation of
their plan assets before making distributions to terminated participants,
retired participants or beneficiaries. The following should be taken into account in making t=
his
determination: 1.= The first action that should be taken by the plan sponsor is to determine if = the plan document permits an interim valuation. The document will require a valuation at least annually, but many documents contain provisions that a= llow the employer, trustee or other fiduciary to conduct a valuation at any ot= her date or dates deemed necessary or appropriate during the Plan Year. This = is particularly true of plans which contain only a single annual valuation d= ate, but may also be included where a plan requires more frequent valuations.<= o:p> 2.=
If
the plan does include such provisions, the question may arise as to wheth=
er
or not the interim valuation may be applied to a previously terminated
participant who has requested distribution of his or her account balance.
Under Internal Revenue Code Section 411(d)(6),=
the
valuation date is not a protected benefit. This means a plan fiduciary do=
es
not violate the anti-cutback rule if the fiduciary conducts an interim
valuation in accordance with plan provisions. So the interim valuation ma=
y be
applied to a previously terminated participant who has requested
distribution. 3.=
Prior
practice in the plan in the event of market fluctuations should be examin=
ed
before the decision to make an interim valuation is made. An interim
valuation would be supported if interim valuations have been performed in=
the
past under similar circumstances. 4.=
If
a plan document does not include provisions for an interim valuation, the
plan may be amended to add such provisions. However, in general this would
not be applicable to participants who terminated prior to the adoption of=
the
amendment and had requested a distribution. 5.=
In
order to make the interim valuation determination clearer, a plan sponsor=
may
wish to adopt an amendment or put a consistent administrative practice in
place which requires an interim valuation in case of a more than x% market
swing up or down since the most recent valuation. The x% would be based on
some index such as the S&P 500. A
note of caution, plan sponsors should always see to it that communications
reflecting account balances make it clear that any balance shown only
indicates the balance as of the date shown and is not necessarily what a
terminated or retired participant, or a beneficiary will receive. The same
caution should be exercised in verbal communications to participants or
beneficiaries. CASH BALANCE / HYBRID PENSION PLAN A cash balance plan is a hybrid defined benefit plan. A
defined benefit plan establishes a monthly benefit payable at normal
retirement age and the employer must make contributions to the plan to fu=
nd
for the benefits. A typical defined benefit plan would define the benefit=
as
a % of compensation to be paid monthly beginning at normal retirement age=
for
the life of the participant. The employer then funds the plan on an annual
basis using actuarial assumptions designed to provide sufficient plan ass=
ets
to provide for the benefits. Note that benefits from small defined benefi=
t plans
are not typically paid-out as a life annuity, but rather as a lump-sum wi=
th
an equivalent value that can be rolled over to an IRA. A cash balance plan is a hybrid because the benefit is
expressed as a theoretical account balance similar to a defined contribut=
ion
plan. The plan document will define a contribution credit such as a
percentage of the participant’s compensation (50%) or a flat dollar
amount ($90,000) or a combination of the two (50% of compensation not to
exceed $100,000). The plan document will also define an interest credit w=
hich
is applied to the participants theoretical account balance. Typical rates=
for
the interest credit are 5% per year or the 30 year Treasury Constant Matu=
rity
rate determined at the beginning of the year. It is important to note that the defined contribution
limits, such as the annual additions limit ($49,000 for 2011), do not app=
ly
to a cash balance plan. Rather the maximum benefit limits apply to the
participant’s theoretical account balance which is converted to a
monthly benefit that would be paid over the participant’s life
expectancy. Also note that the rate of interest is fixed. As such,
investment risk is borne by the plan sponsor. If plan assets earn less th=
an
the interest rate, the sponsor must pay the difference in the form of hig=
her
annual contributions to the plan. Conversely, the sponsor will make lower
annual contributions if plan assets earn more than the plan rate. As with
traditional defined benefit plans, any excess or deficiency in the plan
investment earnings are amortized over a number of years so the
sponsor’s contribution does not need to account for the difference =
in
earnings in the year in which it occurs. Cash balance plans have several advantages over
conventional defined benefit plans. One of the most appealing is that
it’s more easily understood. A participant’s benefit is norma=
lly
the participant’s theoretical account balance. Understanding the
accrued benefit and retirement benefit in a conventional defined benefit =
plan
is not nearly as straightforward. Also a plan sponsor can more easily determine the cost=
of
benefits and contributions to the plan on a per participant basis by comp=
aring
the participant’s contribution credits, interest credits and
theoretical account balances. As mentioned earlier a cash balance plan is not subjec=
t to
the defined contribution plan limits. As such, much higher contributions =
can
be made to a cash balance plan. However, one impor=
tant
aspect is the same, both defined benefit and cash balance pension plans a=
re
subject to the minimum funding requirements. The funding is still actuari=
ally
determined and the sponsor must deposit the minimum contributions each ye=
ar
by the designated due dates. INCREASE IN USE=
R FEES
FOR DETERMINATION LETTERS If an employer wants reliance that its qualified
retirement plan satisfies the tax rules, it must receive IRS approval of =
the
plan document. IRS increased the fees applicable to determination letters=
for
individually designed plans from $1000 to $2500 for plans without a
discrimination test review and from $1,800 to $4,500 for plans requiring a
discrimination test review. However, IRS did not increase the determination letter=
fee
for an employer who adopts a pre-approved prototype or volume submitter p=
lan.
This fee remains at $300. In most cases, an employer using a pre-approved plan c=
an
rely on the approval letter IRS has already issued for such plan and sinc=
e no
submission to IRS is required, no user fee is involved. The IRS via its
pricing is expressing its goal that more employers adopt pre-approved pla=
ns
rather than individually designed plans which are much more time consuming
for IRS to review. Pre-approved plans have become much more flexible so t=
hat
fewer employers need individually designed plans. In fact, it appears that
IRS may extend the pre-approved program to plans previously limited to the
individually designed format such as ESOPS and cash balance plans. In order to provide our clients with the most reasonab=
le
costs, Pacific Retirement Plans utilizes pre-approved plan documents in a=
ll
cases where they are appropriate. All of us at Pacific Retirement Plans |
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