PORTFOLIO

Specialized Qualified Plans — Cash Balance, Target, Age-Weighted and Hybrids (Portfolio 352)

Tax Management Portfolio, Specialized Qualified Plans — Cash Balance, Target, Age-Weighted and Hybrids, No. 352-4th, describes alternative or hybrid plan designs. These hybrid plans include target benefit plans, cash balance plans, pension equity plans, floor-offset plans, age-weighted profit-sharing plans, points plans and §414(k) plans.

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DESCRIPTION

Tax Management Portfolio, Specialized Qualified Plans — Cash Balance, Target, Age-Weighted and Hybrids, No. 352-4th, describes alternative or hybrid plan designs. These hybrid plans include target benefit plans, cash balance plans, pension equity plans, floor-offset plans, age-weighted profit-sharing plans, points plans and §414(k) plans.
The Portfolio explores the key features of and differences between defined benefit and defined contribution plans in an effort to more fully understand the hybrid nature of such alternative plan designs.


Buy Specialized Qualified Plans — Cash Balance, Target, Age-Weighted and Hybrids (Portfolio 352) now


AUTHORS

KYLE N. BROWN
Kyle N. Brown, University of North Carolina at Chapel Hill (B.A.); Campbell University School of Law (J.D.); National Law Center at George Washington University (LL.M. in Taxation); formerly with Internal Revenue Service, Employee Plans Technical and Actuarial Division; member, District of Columbia Bar, North Carolina Bar, Tax Court Bar, and United States Supreme Court Bar.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Overview

B. Nature of the Promise

C. Pattern of Benefit Accrual

1. Comparing Benefits from Defined Benefit and Defined Contribution Plans

2. Some Caveats

D. Allocation of Risk

E. Administrative Issues

F. Section 415 Considerations

II. Target Benefit Plans

Introductory Material

A. An Overview

B. Nondiscrimination Safe Harbor

1. Requirements for Safe Harbor Treatment

2. Setting the Target Benefit Formula

a. Flat Benefit

b. Unit Credit

c. Integrating the Formula

d. Defining Compensation in the Formula

e. Permitted Non-Uniformities

3. Determining the Contributions

a. In General

b. The Parameters of the Funding Determination

c. Determining Contributions After Normal Retirement Age

4. Crediting Service, Including Past Service, Under a Target Plan

a. The General Rule Against Past Service

b. Past Service Exception

5. Changing a Target Plan

a. Changing the Target Benefit Formula

b. Changing a Safe Harbor Formula to Another Safe Harbor Formula

c. Changing from a Non-Safe Harbor Target Plan to a Safe Harbor Target Plan

d. Special Rule for Changes from Pre-TRA 1986 Safe Harbor Formula to a Post-TRA 1986 Safe Harbor Formula

e. Changing the Interest Rate

6. Interaction with § 415 and Top-Heavy Rules

a. Effect of § 415

b. Top-Heavy Rules

C. Nonsafe Harbor Designs

III. Age-Weighted Profit-Sharing Plans

A. The Basic Plan Design

1. Background - The Nondiscrimination Rules

2. The Implicit Safe Harbor

3. Comparison with Traditional Profit-Sharing Design

4. Using Permitted Disparity in the Age-Weighted Formula

5. Overall Benefit Delivery of an Age-Weighted Design

B. Specifics of Cross-Testing

1. Cross-Testing Methodology

2. Actuarial Assumptions

3. Compensation

4. Employees Working Past Normal Retirement Age

C. Designing and Applying the Implicit Safe Harbor Design

1. Providing a Specific Contribution for a Particular Employee

2. Keying Off Total Contributions

3. Funding Toward a Specified Benefit

D. New Comparability Plans

1. Policy Rationale

2. Cross-Tested Defined Contribution Plan

a. Broadly Available Allocation Rates

b. Age-Based Allocation Rates

c. Minimum Gateway for Cross-Testing

3. Defined Benefit/Defined Contribution Aggregated Plans

a. Primarily Defined Benefit in Character

b. Broadly Available Separate Plans

c. Minimum Gateway Allocations

d. Component Plans and Permitted Disparity

E. Effect of Other Qualification Requirements

1. Effect of § 415 Limits

2. Effect of Top-Heavy

3. Age Discrimination

IV. Points Plans

A. Overview

B. Nondiscrimination

1. General Test and Cross-Testing

2. The Points Plan Safe Harbor

a. In General

b. Requirements

c. Top-Heavy Requirements

d. Limitations of Points Plan Safe Harbor

V. Cash Balance Plans

Introductory Material

A. Overview of the Basic Design

1. An Account Based Defined Benefit Plan

2. An Indexed Career Pay Plan

B. Plan Design Considerations

1. Benefit Delivery and Cost

2. Employee Acceptance and Communication

3. Defined Benefit Plan Attributes

4. Allocation of Risk and Reward

5. Rate of Pay Credits

6. Setting the Interest Crediting Rate

7. Lump-Sum Benefits

8. Transition Issues

9. Ancillary Benefits

C. Qualification and Legal Issues

1. Accrued Benefit Issues

a. Definitely Determinable Benefits

b. Definition of Accrued Benefit

c. Guaranteed Interest Credits

d. Ad Hoc Interest Credits

e. Changing the Interest Rate or Conversion Factors

f. Vesting Requirements

g. Plan Termination Requirements

2. Age Discrimination

a. Basic Statutory Standard

b. Disparate Treatment v. Disparate Impact

c. IRS Guidance

d. Case Law

e. Revised Standard for Pension Age Discrimination Under the Pension Protection Act of 2006

3. Hybrid Plan Conversions

a. Common Conversion Methods

b. Wear-Away Controversy

c. Legal Standards

d. Revised Minimum Conversion Requirements Under the Pension Protection Act of 2006

4. Back-Loading

5. Calculating Lump-Sum Benefits

a. Application of § 417(e)

b. “Whipsaw” Calculation

c. Elimination of the Whipsaw Calculation

d. Interest Crediting Rates

6. Nondiscrimination Analysis

a. Nondiscrimination Safe Harbor

(1) Interest Credits

(2) Determination of the Accrued Benefit

(3) Other Requirements

b. The General Nondiscrimination Test

(1) In General

(2) Changes in Formula Under the General Test

c. Integrating the Cash Balance Design

d. New Comparability Standards for Cash Balance Plans

7. Section 415 Limits

VI. Pension Equity and other Lump-Sum Retirement Plans

A. Introduction

B. Comparing PEP Plans to Traditional Final Pay Plans and Cash Balance Plans

C. Qualification Issues

1. Definition of Accrued Benefit

2. Calculation of Lump Sum

3. Accrual Rules

4. Nondiscrimination

5. Section 415

6. Age Discrimination

a. In General

b. Revised Standard for Pension Age Discrimination Under the Pension Protection Act of 2006

c. Revised Minimum Conversion Requirements Under the Pension Protection Act of 2006

VII. Floor-Offset Plans

A. Overview

1. History of Floor-Offset Plans

2. Advantages and Disadvantages

B. Qualification Requirements

1. Definitely Determinable

2. Accrual Rules

3. Determining the Offset

4. Restrictions on Using Certain Defined Contribution Plans

a. Plans Subject to § 401(k) and (m)

b. ESOPs and Other Plans Investing in Employer Securities

5. Minimum Coverage

6. Nondiscrimination

a. General Test

b. Safe Harbor

c. Testing Benefits, Rights and Features

7. Section 401(a)(26)

8. Qualified Joint and Survivor Requirements

9. Participant-Directed Investments

10. Employees Working Past Normal Retirement Age

VIII. Section 414(k) Plans

Introductory Material

A. Characteristics of a § 414(k) Plan

1. The Statutory Provision

2. A Single Plan or Two Plans?

3. Defined Benefit or Defined Contribution?

4. Character of the Separate Account

5. Funding the Separate Account

B. Using a § 414(k) Account to Replace Other Defined Contribution Plans, and Funding with Surplus Defined Benefit Plan Assets

1. Description of the Transaction

2. Possible Legal Concerns

a. Reversion Excise Tax

b. Income Tax

c. Exclusive Benefit Rule

d. Matching Contribution

e. IRS Ruling


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Sample Age-Weighted Profit-Sharing Plan Allocation Language (Excerpt)

Worksheet 2 Age-Weighted Allocation Factors

Worksheet 3 Sample Target Benefit Plan Contribution Language (Excerpt)

Worksheet 4 Table of Present Value Factors and Amortization Factors for Target Benefit Plans

Worksheet 5 Sample Allocation Language for Points Plan (Excerpt)

Worksheet 6 Sample Cash Balance Plan Provisions (Excerpt)

Worksheet 7 Sample Pension Equity Plan Provisions (Excerpt)

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

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