Benefits Blog

Important Development for Cash Balance Plans—But You Must Act Quickly!

Posted by Nathan Carlson on Wednesday, January 29, 2014 @ 02:49 PM

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Slide1The IRS announced on January 23, 2014 that Cash Balance defined benefit plans will eventually be able to utilize pre-approved master and prototype plan documents.  Currently,  all Cash Balance plans must  be written as individually-designed documents.  The IRS announcement extends to  February 2, 2015 the deadline for plan document drafters to submit  their new traditional defined benefit master and prototype  plan documents for IRS approval.  By extending that deadline from January 31, 2014, the IRS stated it will now have time to publish guidance on Cash Balance plan language that will eventually be acceptable under the IRS’s master and prototype program. 

Why this is such an important development

Individually-designed plan documents are more expensive to create than master and prototype plan documents.  In addition, an individually-designed plan document cannot rely on any existing IRS plan document approval letter  but rather the plan should be submitted to the IRS for its own Letter of Determination.  This whole process is very costly to the client and time-consuming.

On the other hand, master and prototype plan documents are pre-approved by the IRS and have their own approval letter which the adopting client generally can rely on.  Since there is usually no need to separately submit each prototype document to the IRS for approval, this form of document saves the client time and money.

Why the rush?

Companies with individually-designed Cash Balance plan documents have until January 31, 2014 to submit their plans to the IRS for a Letter of Determination[1].  If the plan fails to file for a Determination Letter by the January 31st deadline, any existing Letter of Determination becomes obsolete and the only way that the plan can obtain a Letter of Determination is through the IRS Voluntary Correction Program (VCP). 

However, rather than continuing as an “individually-designed” plan, Cash Balance plans will have the option to transition to a less-expensive prototype plan document, once the Master documents have been reviewed and approved by the IRS. 

Employers that maintain a Cash Balance plan can indicate their intent to transition to a prototype plan document by signing Form 8905 by March 31, 2014.  Once Form 8905 is signed, the employer will be able to rely on the forthcoming IRS approval letter  obtained by the Master/Prototype Plan Sponsor and there will generally be no need for the employer to obtain its own Letter of Determination for the individually-designed plan document that the employer presently has.

 When will the IRS issue Approval  Letters for Master/Prototype Cash Balance plans?

Plan document drafters now have until February 2, 2015 to submit their master /prototype traditional (i.e. non-Cash Balance) defined benefit plan document language to the IRS for review and approval.  Once the IRS publishes guidance on Cash Balance plan language that will be acceptable under the master/prototype program, the IRS will also publish guidance on the deadline for plan document drafters to submit their proposed master/prototype cash balance plan documents to the IRS for approval.  We will let you know when the IRS publishes that guidance. 

[1] For individually-designed plans, the submission deadline depends upon the last digit of the plan sponsor’s federal tax ID number.  January 31, 2014 is the deadline for all “Cycle C” plans.  A “Cycle C” plan includes all Cash Balance plans, all governmental plans, and all other plans where the employer’s federal tax ID number ends in either “3” or “8”.

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