3652. What is a cash balance plan?Nuco Employeercline202006-09-13T14:44:00Z2014-08-06T13:10:00Z2014-08-06T13:10:00Z25413085Summit Business Media257361914Site Map/Retirement Plans/Pension And Profit Sharing/Plan Types and Features/Defined Benefit Planscash balance2005-01-25T00:00:00ZTaxFactsDefaultArticle115810373-00-tf1.xml375.00;#2235;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What is a cash balance plan?75400.0000000000TaxFactsDefaultArticle2010-01-14T23:43:36ZSBMEDIA\moss-admin3652. What is a cash balance plan?A cash balance plan is a defined benefit plan that calculates benefits and contributions in a manner similar to the way that defined contribution plans make those calculations. The similarity ends in that a cash balance plan’s calculations require an actuary. A cash balance plan resembles a defined contribution plan in that each employee has a hypothetical account, or “cash balance,” to which contributions and interest payments are credited. There is no separate account and the amount credited to the account is based on a provision in the plan document. With no separate account, there is no directed investing available. As with other defined benefit plans, the employer bears both the risk and the benefits of investment performance. That is, losses in the plan’s investments generally require additional employer funding. In a typical cash balance plan, the employee’s benefit accrues evenly over his or her years of service, with annual pay credits to a hypothetical account. These pay credits usually are a fixed percentage of pay that is stated in the plan document, such as 4 percent, 30 percent, etc. The actual amount that must be contributed is determined actuarially. This ensures that the plan has sufficient funds to provide the promised benefits.For plan years beginning in 2012, the interest credit (or the equivalent amount) for any plan year must be at a rate that is not greater than a “market rate” of return. The term “market rate” of return is defined in regulations issued in 2010.Treas. Reg. §1.411(b)(5)-1(d). A plan will not fail this requirement merely because it provides for a reasonable minimum guaranteed rate of return or for a rate of return equal to the greater of a fixed or variable rate.29 U.S.C. §623(i)(1)(B)(i)(I). An interest credit of less than zero may not result in the account balance being less than the aggregate amount of contributions credited to the account.IRC Sec. 411(b)(5)(B)(i)(II); Treas. Reg. §1.411(b)(5)-1. This legislative change eliminates the issue of “whipsaw,” in which disparate interest rates used for crediting and discounting purposes resulted in the discounted present value of employees’ accounts being higher than the theoretical account’s value.Planning Point: The Moving Ahead for Progress in the 21st Century Act (MAP-21)Pub. L. No. 112-141. enacted on July 6, 2012, contained interest-rate stabilization provisions for defined benefit plans. In August 2012, the IRS issued Notice 2012-55,2012-36 I.R.B. 332 (Aug. 16, 2012). See also Notice 2014-43, 2014 IRB LEXIS 399 (July 9, 2014). which outlined the MAP-21 segment rates to be used for plan years beginning in 2012.Notice 2013-11, 2013-11 I.R.B. 610 (Feb. 12, 2013) contains the 2013 MAP-21 stabilized segment rates. See also Notice 2014-43, 2014 IRB LEXIS 399 (July 9, 2014). MAP-21 revises the three segment rates used under the single employer funding rules. The IRS issued Notice 2012-612012-2 C.B. 479 (Sept. 11, 2012), at H-1. to provide guidance on pension funding stabilization under MAP-21. The guidance gives flexibility to plan administrators of plans that use the third segment rate by allowing the administrator to interpret the plan terms as requiring either the pre-MAP-21 third segment rate or the MAP-21 third segment rate, as long as the interpretation is applied for interest credited after the first plan year to which MAP-21 is applied for purposes of funding. An amendment to reflect that interpretation will not be considered a plan cutback. The guidance further states that although Treasury Regulation Section 1.411(b)(5)-1(d)(1)(iii), which provides guidance on the definition of “market rate,” is effective for plan years beginning after January 1, 2012, the IRS plans to amend the final regulations to postpone the effective date until plan years beginning after January 1, 2014.2012-2 C.B. 479 (Sept. 11, 2012), at H-1 (b). If the final regulations do not state that the third segment rate is a market rate under MAP-21, then the plan sponsor must amend the plan to reflect the proper rate.