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]