IRS takes a look at Cash Balance Formulas for Funny Business

Throughout my career as an ERISA attorney, I’ve come across actuarial third party recordkeeping firms that push the envelope in cash balance and defined benefit plan designs. I can’t forget the actuaries who still push for special trustees and trustees with life insurance in defined benefit plans, years after the Internal Revenue Service (IRS) said no. What frightens me is that I almost accepted an ERISA attorney position at one of these firms many years ago.


So it should come as no surprise that the IRS is directing its agents to review cash balance formulas especially as it relates to compensation.


A qualified plan “within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement.”


The IRS is advising their agents to determine whether a benefit formula based on only a portion of annual compensation, a special bonus, or other measure not based on annual compensation, is “definitely determinable.”


The memo they issues states that if the terms of the plan specifically allow the employer to vary the employee’s compensation used in the benefit formula (e.g., an employee’s annual compensation less an amount designated by the employer), the plan would violate the definitely determinable rule. That’s a big rule to violate and I applaud the IRS trying to crack down what I think is some trickery in the administration of cash balance plans.



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