1. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company1 What is it? A qualified defined benefit plan that provides for annual employer contributions at a specified rate to hypothetical individual accounts that are set up for each plan participant Employer guarantees –contribution level –minimum rate of return on each account

2. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company2 When is it indicated? have relatively young employees with substantial years to accumulate earnings employees concerned with security of retirement income workforce large and most are middle-income

3. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company3 When is it indicated? employer able to spread administrative costs over relatively large group of employees employer wants to convert existing defined benefit plan to plan that –provides more attractive benefit for younger employees –may lower costs for older employees

4. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company4 Advantages Tax deferred savings some older employees may be able to use 10 year averaging employee does NOT have investment risk within limits, plan guaranteed by PBGC plan benefits easily communicated and understood

5. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company5 Disadvantages retirement benefit may be inadequate for older plan entrants complex to administer employer bears investment risk, increasing employer costs

6. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company6 Design Features of These Plans hypothetical individual account for each participant credits by employer at least annually with –“pay credit” –“interest credit”

7. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company7 Design Features of These Plans employer’s annual cost for plan determined on actuarial basis employer must make up difference if actual plan earnings fall short of total interest credits plan participants do not have investment choice loans can be made available but due to administrative problems are seldom offered

8. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company8 Design Features of These Plans Modification of Existing Defined Benefit Formula –If employer dissatisfied with defined benefit plan, less costly to convert to cash balance pension than to convert to defined contribution plan –conversion can reduce accrual rate for employee’s benefit

9. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company9 Tax Implications employer plan contributions tax deductible when made Section 415(b) defined benefit plan limits apply to cash balance plans employee defers tax on employer contributions rules for qualified plan distributions must be followed some older employees may qualify for 10 year averaging

10. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company10 Tax Implications plan subject to Sec 412 minimum funding rules plan subject to PBGC mandatory coverage some employers can receive business tax credit of up to $500 for “qualified plan startup costs” plan may permit “deemed” IRA plan subject to ERISA reporting and disclosure rules

11. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company11 Alternatives money purchase and profit sharing –build up qualified retirement accounts for employees –do not guarantee a minimum investment return defined benefit plans –guarantee employee benefits, but –complex to design and administer individual retirement savings –only IRA allows tax deferral

12. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company12 True or False? 1.A cash balance plan offers an adequate retirement for older entrants. 2.Cash balance plans have cheaper administrative costs than defined contribution plans 3.An advantage of a cash balance plan is that there is very little administrative cost.

13. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company13 True or False? 4.A pay credit allocates plan investments according to an employee’s pay. 5.Employees bear investment risk with a cash balance plan.

14. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company14 Discussion Question What factors would encourage an employer with a defined benefit plan to convert to a cash balance plan? After such a conversion, who are or would be the ‘winners’ among the employees and who are or would be the ‘losers’?

15. Chapter 15 Employee Benefit & Retirement Planning Cash Balance Pension Plan Copyright 2009, The National Underwriter Company15 Design Features of These Plans “pay credit” uses compensation-based formula may be integrated with Social Security “interest credit” amount of employer-guaranteed investment earnings credited annually to each employee’s account must follow plan formula, cannot be discretionary