ID: UILC: CCA_2016032811224324 411.03-00 Number: 201617006 Release Date: 4/22/2016 From: Sent: Monday, March 28, 2016 11:22:43 AM To: Cc: Bcc: Subject: legal advice regarding cash balance plans Subject: Eligibility of certain cash balance plans for the § 411(b)(1)(H) safe harbor rules regarding lump sum-based benefit formulas and indexed benefits This Chief Counsel Advice responds to your request for assistance. This advice m ay not be used or cited as precedent. BACKGROUND Som e defined benefit plans have statutory hybrid benefit formulas (as defined in § 1.411(a)(13) - 1(d)(4)) and m ust comply with the requirem ents applicable to statutory hybrid plans , including the vesting requirem ents of § 411(a)(13)(B) and § 1.411(a)(13) - 1(c), the plan conversion am endment requirem ents (if applicable) of § 411(b)(5)(B)(ii) and § 1.411(b)(5) - 1(c), and the capital preservation rule of § 411(b)(5)(B)(i)(II) and § 1.411 (b)(5) - 1(d)(2). Som e of these plans, commonly called cash balance plans, contain a benefit formula in w hich a participant’s accum ulated benefit is expressed as the current balance of a hypothetical account m aintained for the participant, with a participan t’s accrued benefit equal to the single life annuity payable at norm al retirement age (or the current age, if later) that is the actuarial equivalent of the participant’s current hypothetical account balance plus projected future interest credits to that d ate. Many cash balance plans provide that a single-sum distribution of a participant’s benefit is equal to the participant’s hypothetical account balance. However, som e cash balance plans provide that a single - sum distribution of a participant’s benefit is not equal to the participant’s hypothetical account balance and instead is determ ined as the present value of the participant’s accrued benefit using the actuarial assum ptions specified in § 417(e)(3). ISSUE May cash balance plans w ith a single-sum distribution that is determ ined as the present value of the participant’s accrued benefit using the actuarial assum ptions specified in § 417(e)(3) use the safe harbor rules of § 411(b)(5)(A) (w hich apply to lum p sum-based benefit formulas) or § 411(b)(5)(E ) (which apply to indexed benefits) to satisfy the age discrim ination requirements of § 411(b)(1)(H)?

2 CONCLUSION As of the effective date of the 2014 revisions to § 1.411(b)(5) - 1 (which generally apply for plan years beginning on or after January 1, 2017), cash balance plans with a single-su m distribution that is determined as the present value of the participant’s accrued benefit using the actuarial assum ptions specified in § 417(e)(3) are not eligible for the safe harbor rule for plans with lum p sum-based benefit form ulas under § 411(b)(5)(A) and § 1.411(b)(5) - 1(b)(1) (w hich applies to m any cash balance plans using the safe harbor formula m easure described in § 1.411(b)(5) - 1(b)(1)(i)(B)). How ever, these plans are generally eligible for the safe harb or rule for plans w ith indexed benefits under § 411(b)(5)(E) and § 1.411(b)(5) - 1(b)(2). LA W AND ANALYSIS Section 411(b)(1)(H) generally provides that a defined benefit plan is not qualified if an em ployee’s benefit accrual is ceased, or the rate of an e mp loyee’s benefit accrual is reduced, because of the attainm ent of any age. Under § 1.411(b)(5) - 1(b)(1)(i), a plan is not treated as failing to m eet the requirem ents of § 411(b)(1)(H)(i) with respect to an individual who is or could be a participant if, a s of any date, the accum ulated benefit of the individual would not be less than the accum ulated benefit of any sim ilarly situated, younger individual who is or could be a participant. Thus, this test involves a comparison of the accum ulated benefit of an i ndividual who is or could be a participant in the plan with the accum ulated benefit of each sim ilarly situated, younger individual who is or could be a participant in the plan. This rule applies only if the benefit under the plan is based on one of three saf e-harbor formula measures, which are set forth in § 1.411(b)(5) - 1(b)(1)(i)(A) through (C). The safe harbor form ula measure set forth in § 1.411(b)(5) - 1(b)(1)(i)(B) is the current balance of the hypothetical account m aintained for the participant if the accum ulated benefit under the plan is the current balance of a hypothetical account. Pursuant to § 1.411(b)(5) - 1(b)(1)(ii)(F), for plan years that begin on or after January 1, 2017, [1] a benefit measure is a safe-harbor form ula measure described in § 1.4 11(b)(5) - 1(b)(1)(i)(B) only if the formula under which the balance of a hypothetical account is determ ined is a lum p sum-based benefit form ula. A benefit formula does not constitute a lum p sum-based benefit formula, according to § 1.411(a)(13) - 1(d)(3), un less a distribution of the benefits under that form ula in the form of a single-sum paym ent equals the accum ulated benefit (except to the extent the single-sum pay me nt is greater to satisfy the requirem ents of § 411(d)(6)). Som e plans with cash balance ben efit for mu las provide that the single-sum distribution is determ ined as the present value of the participant’s accrued benefit determ ined using the actuarial assum ptions specified in § 417(e)(3). These plans are not plans with a lum p sum-based benefit form ula because the amount of the single-sum distribution is not equal to the hypothetical account balance. See § 1.411(a)(13) - 1(d)(3). Therefore, they are not eligible for the safe harbor under § 1.411(b)(5) - 1(b)(1).

[1] This rule was added in T.D. 9693, 79 Fed. Reg. 56442 (September 19, 2014). Under § 1.411(b)(5) - 1(f)(2)(i)(B)(3), the effective date of this rule for collectively bargained plans is the later of (i) January 1, 2017; and (2) the earlier of January 1, 2019; and the date on which the collective bargaining agreement terminates.

3 Under § 1.411(b)(5) - 1(b)(2)(i), a plan i s not treated as failing to m eet § 411(b)(1)(H) solely because a benefit formula (other than a lum p sum-based benefit formula) “provides for the periodic adjustm ent of the participant’s accrued benefit under the plan by m eans of the application of a recogn ized index or m ethodology. An indexing rate that does not exceed a market rate of return is deem ed to be a recognized index or m ethodology.” This safe harbor for indexed benefit plans is not available “unless the aggregate adjustments m ade to a participa nt’s accrued benefit under the plan (determ ined as a percentage of the unadjusted accrued benefit) in a period would not be less than the aggregate adjustm ents for any sim ilarly situated, younger participant. This test requires a com parison, for each peri od, of the aggregate adjustm ents for each individual who is or could be a participant in the plan for the period with the aggregate adjustm ents of each other sim ilarly situated, younger individual who is or could be a participant in the plan for that perio d.” See § 1.411(b)(5) - 1(b)(2)(ii). Under a cash balance plan, a participant’s accrued benefit at any relevant tim e is equal to the single life annuity payable at norm al retirement age (or the current age, if later) that is the actuarial equivalent of the participant’s current hypothetical account balance plus projected future interest credits to that date. If the plan’s interest crediting rate does not exceed a m arket rate of return, then the plan’s interest crediting rate is deem ed to be a recognized ind ex or m ethodology for purposes of applying the rules for indexed benefits under § 411(b)(5)(E) and § 1.411(b)(5) - 1(b)(2). If the interest crediting rate under a cash balance plan is the same for participants of all ages, then the periodic adjustm ents that are applied to the hypothetical account balance for an interest crediting period do not provide an aggregate adjustm ent to the accrued benefit for that period for any participant that would be less than the aggregate adjustm ent for that period for any sim ilarly situated younger participant. Therefore, a cash balance plan under which the single-sum distribution is determ ined as the present value of the participant’s accrued benefit using the actuarial assum ptions specified in § 417(e)(3) (so that the safe harbor under § 1.411(b)(5) - 1(b)(1) does not apply to the plan) m ay be tested for com pliance with the requirem ents of § 411(b)(1)(H) disregarding future interest credits pursuant to the rules for indexed benefits under § 411(b)(5)(E) and § 1.411(b)(5) - 1(b)( 2). Footnote 1: This rule was added in T.D. 9693, 79 Fed. Reg. 56442 (Septem ber 19, 2014). Under § 1.411(b)(5) - 1(f)(2)(i)(B)(3), the effective date of this rule for collectively bargained plans is the later of (i) January 1, 2017; and (2) the earlier of January 1, 2019; and the date on which the collective bargaining agreem ent terminates.