The document discusses new regulations for cash balance and hybrid pension plans. Key points include: - The regulations, effective 2016, apply to "statutory hybrid plans" and change allowable interest credit rates. - Interest credits can now be set differently for different employee groups, based on actual returns from subsets of trust assets. - The minimum interest credit floor was lowered from 4-5% annually to 3% cumulatively. Relief is provided to reduce existing higher floors. - After plan termination, interest credits must now use the 2nd segment rate from the last pre-termination month, rather than a 5-year average. - Allowing different interest credits by group and the lower 3

1. Cash Balance & Hybrid Plans
Final & Proposed Regulations
Minneapolis Pension Council
October 16, 2014

2. Outline
 Brief cash balance overview
 What’s new in the regulations
 Surprises
 Issues & answers
1

3. Overview: What a Cash Balance Plan Is
 It’s a DB plan that looks like a DC plan
 Big DB deductions, DC-like simplicity
2

4. Overview: Cash Balance Plan Example
DB/DC combo
 Common for professional firms
 Enables large deductible contributions for owners

5. Overview: Cash Balance Plan Example
Age
2014
Pay
Cash
Balance
Credit
PS &
3% Safe
Harbor
401(k) &
Catchup Total
Dr. F’stein 60 $260,000 $230,000 $34,500 $23,000 $287,500
Igor 40 50,000 1,500 3,750 whatever 5,250+401k
Inga 30 30,000 900 2,250 whatever 3,150+401k
DB/DC combo: cash balance & profit sharing
 This example is for a PBGC-covered plan, Frankenstein Mfg. Inc.
 Gateway here is 7½% DC; Igor & Inga get 3% cash balance credits
 A PBGC-exempt professional firm may need to limit DC er contrs to 6%

6. Overview: Cash Balance Buildup
Pay Credits
+ Interest Credits
= Cash Balance!
5
Year Pay Credit
Interest
Credit
@ 10%
Cash Balance
1 $100,000 $0 $100,000
2 100,000 10,000 210,000
3 100,000 21,000 331,000
4 100,000 33,100 464,100
5 100,000 46,410 610,510
6 100,000 61,051 771,561
7 100,000 77,156 948,717
8 100,000 94,872 1,143,589
9 100,000 114,359 1,357,948
10 100,000 135,795 1,593,742

7. Overview: PPA “Statutory Hybrid Plan”
6
Definition DB plan where portion of accumulated benefit is:
 Current hypothetical account balance
(cash balance plan); or
 Accumulated percentage of final average pay
(PEP plan)
What you get  Whipsaw relief
 Age-discrimination relief
What you give  100% vesting in 3 years
 Interest credit can’t exceed “market rate of return”

8. What’s New: Final & Proposed Regs
 Effective for plan years starting in 2016
 Applies to statutory hybrid plans
 Changes to allowable “market” interest credits
 §411(d)(6) relief for noncompliant interest rates
 Different interest credits for different groups!
 Interest credits after plan termination
7

9. What’s New: “Market” Interest Credits
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Type of Rate Comments
Old (2010)
Maximum Floor
New (2014+)
Maximum Floor
Fixed 5% 6%
Actual return
on assets
May now be based on a
subset of trust
3% cumulative 3% cumulative
Mutual fund
or annuity contract
Broad US or
int’l market fund
3% cumulative 3% cumulative
Notice 96-8 Treasury
From 3-month + 175 bp
to 30-year + 0 bp
4% annual
or 3% cumulative
5% annual
or 3% cumulative
Segment rates
417(e) lump sum
or 430(h) funding
4% annual
or 3% cumulative
4% annual
or 3% cumulative
CPI Plus 0-300 bp
4% annual
or 3% cumulative
5% annual
or 3% cumulative
Other
Only as announced
by Commissioner!!

10. What’s New: §411(d)(6) Relief
 Anti-cutback rules: each pay credit includes all
future interest credits
 So, couldn’t reduce future interest credits
 Except to comply with new rules
 For example: 3½% cumulative floor could be
reduced to 3% going forward
 Option to preserve pre-amendment balance
with old (noncompliant) interest credits
9

11. What’s New: Interest Credits by Group
 Interest credit = actual return on subset of assets
 Can now set up CB plan like a target date fund
 Asset pool requirements
 Diversified
 Employer stock & real estate < 10% of pool
 Market value of pool =~ benefits (account balances)
10

12. What’s New: After Plan Termination
 PPA: post-plan-termination interest crediting
rates equal 5-year pre-termination average
 For a market-based plan, PPA rule produced
odd results at the end of a bull or bear market
 May now use PPA 2nd (middle) funding segment
rate for the last pre-termination month
11

13. Surprises
 Different interest credits for different groups
 3% cumulative floor < 4% - 5% annual floor
 Specified rates only!
 §411(d)(6) relief for future interest credits
12

14. Issues: Interest Credits by Group
 This will expand the appeal of cash balance plans
 Need to ensure that it’s nondiscriminatory
 Will need to track participants through different
asset pools and crediting rates
 It will be a recordkeeping and testing challenge,
but worth it
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15. Issues: Maximum 3% Cumulative Floor
 Could demonstrate that it’s always <= 3% annual
 And 3% annual < permitted 4% - 5% annual
 Or...use §411(d)(6) relief to reduce floor > 3%
14

16. Recap
 Brief cash balance overview
 What’s new in the regulations
 Surprises
 Issues & answers
 Questions?
15

17. 16
Contact Information
Mark Schulte, FSA, EA, MAAA
marks@vaniwaarden.com
612.596.5971
Jim van Iwaarden, FSA, EA, MAAA
jimvi@vaniwaarden.com
612.596.5961
Van Iwaarden Associates
840 Lumber Exchange
10 South Fifth Street
Minneapolis, MN 55402
www.vaniwaarden.com
1.888.596.5960