The document summarizes new regulations for cash balance and hybrid pension plans from a presentation given on October 16, 2014. Key points include: - The regulations allow different interest crediting rates for different participant groups, tracking returns on subsets of plan assets. - A new cumulative 3% floor replaces the previous annual 4-5% floor for determining minimum interest credits. - Plans have relief to reduce future interest credits to comply with the new rules through a §411(d)(6) provision. - Other changes address determining interest credits after plan termination and expanded opportunities for cash balance plans. Issues around nondiscrimination testing and recordkeeping with different crediting rates were discussed.

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

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

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

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

5. Overview: Cash Balance Plan Example
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%
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

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
ƒ Effective for plan years starting in 2016
ƒ Applies to statutory hybrid plans
ƒ Changes to allowable “market” interest credits
ƒ §411(d)(6) relief for noncompliant interest rates
ƒ Different interest credits for different groups!
ƒ Interest credits after plan termination
7

9. What’s New: “Market” Interest Credits
8
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
ƒ Anti-cutback rules: each pay credit includes all
future interest credits
ƒ So, couldn’t reduce future interest credits
ƒ Except to comply with new rules
ƒ For example: 3½% cumulative floor could be
reduced to 3% going forward
ƒ Option to preserve pre-amendment balance
with old (noncompliant) interest credits
9

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

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

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

14. Issues: Interest Credits by Group
ƒ This will expand the appeal of cash balance plans
ƒ Need to ensure that it’s nondiscriminatory
ƒ Will need to track participants through different
asset pools and crediting rates
ƒ It will be a recordkeeping and testing challenge,
but worth it
13

15. Issues: Maximum 3% Cumulative Floor
ƒ Could demonstrate that it’s always <= 3% annual
ƒ And 3% annual < permitted 4% - 5% annual
ƒ Or...use §411(d)(6) relief to reduce floor > 3%
14

16. Recap
ƒ Brief cash balance overview
ƒ What’s new in the regulations
ƒ Surprises
ƒ Issues & answers
ƒ 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