Category Archives: DBK

Cash Balance Prototype or Volume Submitter Plans

At the Cincinnati Benefits Conference last week, I was surrounded by some of the giants of plan document design, especially pre-approved prototypes and volume submitter documents. At one point, around one table during lunch, sat the writers of prototypes and volume submitter documents used by more than 70% of 401(k) plans, profit sharing plans, and defined benefit plans. What is missing from that list is cash balance plans. Every writer at that table has written cash balance plan documents. The difference with cash balance plans is that currently cash balance plans are not included in Rev. Proc. 2005-16 as one of the types of plans which can receive an opinion/approval letter by the IRS as a pre-approved plan. For this reason, every time a cash balance plan is adopted by an employer, the plan document is unique and individual. There is no cohesion or uniformity among cash balance plan documents.

On June 13th, a letter was sent to the Chairman Rangel of the House Ways & Means Committee signed by organizations such as the U.S. Chamber of Commerce, ERISA Industry Committee, the American Benefits Counsel, and ASPPA. In that letter, they ask the House Ways & Means Committee to address the IRS’ interpretation of the “greater of” calculation applied to defined benefit plans which convert to cash balance plans.

The “greater of” calculation is when benefits are calculated under both the traditional (defined benefit) formula, and the hybrid (cash balance) formula, and employees are given the greater of the two benefits. Using the “greater of” calculation can create some issues in plan design. It also solves some issues in plan design.

Whether the “greater of” calculation is a good thing which should be permitted, or is a bad thing which should be prohibited, can be discussed, regulated and legislated. Without plan uniformity for cash balance plans, the task of reviewing these plan designs and making these types of determinations is more difficult than is necessary because each plan is unique. If the IRS would include cash balance plans in the pre-approved prototype and volume submitter programs, then this review is simplified because plan designs become more unified under the pre-approved program. Instead of each plan using an individually designed unique plan document, the IRS imposes overall uniformity in design, and plan sponsors have greater confidence in the overall plan system because they are less concerned about a plan document design failure when they use a pre-approved plan.

This is the reason the IRS created the pre-approved prototype and volume submitter program for other plan types, such as 401(k) plans. Imagine if every 401(k) plan was an individually designed unique plan document with no uniformity imposed on the plan designs by the IRS, so as employees moved from one employer to another during the course of their employment life, every employer uses a unique plan document. Then imagine the size of an IRS determination letter program required to review each of these unique 401(k) plan documents. As cash balance plans become more popular, replacing more traditional defined benefit plans, the time has come to include cash balance plans as one of the types of plans which can be pre-approved prototypes and volume submitter plan documents.

[tags]Pension Protection Act, ppa, IRS, ERISA, cash balance, defined benefit, 401(k)[/tags]

Patented Plan Designs

The ABA Law Journal recently published an article about patenting legal strategies. The article, by Steve Seidenberg, was published in the May edition and it titled Crisis Pending: Can a Patent on Legal Strategy Prevent a Client From Taking Your Advice? The Courts May Soon Decide.

For retirement plans, an idea crops up and pretty soon it becomes common – such as cross-tested profit sharing plans using individual classification. Or think about the first guy who came up with an age-weighted design in his plan document. With the Pension Protection Act creating so many possibilities for hybrid plan designs, I thought it would be fun to check the U.S. Patent & Trademark Office.

The U.S. PTO has a handy tool which permits searching existing patents as well as pending applications for certain terms. Using that tool, I did a quick search of issued patents using the search term “ERISA” and found 36 patents. A quick review of those patents found most of them involved some type of computer-implemented data-processing method, and were not just pure plan designs.

A quick search of patent applications using the search term “ERISA” found 92 applications. One of the applications, Pub. App. No. 20070055605 filed August 28, 2006, involves cash balance plan designs. A quick search of “cash balance” and “defined benefit” found 9 pending applications. A quick search of “Pension Protection Act” only finds two applications, which is disappointing while at the same time simply reflects the probable inevitability of the designs. [tags]Pension Protection Act, defined benefit, cash balance, hybrid plan, plan design, patent, pension, ppa[/tags]

DBK Plans and the Shift away from Traditional Defined Benefit Plans

Spent some time today going through section 903 of the Pension Protection Act, which is the section on the combined defined benefit/401(k) plans permitted for plan years after December 31, 2009. The question, which I’ve heard several times over the last couple of months, is how to make the most appropriate choices now in designing a 401k plan and a defined benefit plan so that they can be easily combined after December 31, 2009. The choices to be made in the 401k plan are fairly easy concerning vesting, matching and automatic enrollment. It is maximizing the contribution and deduction limits which makes DBK plans complex.

The Workplace Prof Blog, by Richard Bales, recently published a link to The Shift from Defined Benefit Plans to Defined Contribution Plans, a fairly short paper by Sam Estreicher and Laurence Gold. Even though the paper fails to really discuss the recent guidance issued by the IRS about the 404 deduction limit, and the expected impact of the shift in mortality tables to RP-2000, it is worth thinking about. The contribution limits on defined contribution plans make them insufficient retirement vehicles unless they are combined with another plan which has a higher contribution limit. [tags]DBK, defined benefit, 401(k), combo plan, pension, ppa, pension protection act, section 903[/tags]