; FAQ 893: Cash Balance - recalculation of BOY benefit for EOY valuations

FAQ 893: Cash Balance - recalculation of BOY benefit for EOY valuations

Problem:

When I run an end of year cash balance plan and the interest rate changes from the prior year, how can I get the prior accrued benefit recalculated using the new interest rate?


Solution:

The recalculation of the BOY accrued benefit for EOY valuation plans is done for both cash balance and traditional defined benefit plans in the valuation calculations. The result of this recalculation is stored in the 'Begin of Yr. Accrued Benefit' field.

For plans with EOY valuation dates, both the accrued benefit at the end of the prior plan year ('Prior Accrued Benefit' field) and the recalculated accrued benefit on the first day of the current plan year ('Begin of Yr. Accrued Benefit' field) are stored on the participant's ACCRBENF screen.

For a cash balance plan, the Begin of Yr Accrued Benefit is the greatest of:
a) the accrued benefit determined by adding the participant's Earnings to the Prior Balance to project to the end of the year and projecting from the end of the year to normal retirement using the Assumed Future Interest Rate, dividing the result by the APR at retirement using the CASHBAL assumptions, and
b) the top-heavy minimum accrued benefit, if applicable, and
c) a plan minimum benefit, if applicable.

EXAMPLE:

Plan Effective Date - 1/1/2019
Cash Balance Conversion:
Post-Retirement Mortality - GA2002U
Interest Rates:
2019:
5.0% Current Interest Rate and Post-Retirement Interest Rate
4.0% Assumed Future Interest Rate
APR SLA Age 62 - 152.157

2020:
5.5% Current Interest Rate and Post-Retirement Interest Rate
3.5% Assumed Future Interest Rate
APR SLA Age 62 - 145.471

Participant A:
As of the 12/31/2019 valuation:
AA - 50
NRA - 62
Expected Contribution - 50,000.00
Accrued Benefit as of 12/31/2019 = 50,000.00 x 1.04^(62 - 50) / 152.157 = 526.11 This will be the Prior Accrued Benefit for the 12/31/2020 valuation after Update to New Period is run.

As of the 12/31/2020 valuation:
Prior Balance = Expected Contribution from 2019 = 50,000.00
Earnings = 50,000 x 0.055 = 2,750.00
Begin of Yr Accrued Benefit as of 1/1/2020 = (50,000.00 + 2,750.00) x 1.035^(62 - 51) / 145.471 = 529.41
The Begin of Yr Accrued Benefit is 529.41 assuming the top-heavy minimum and plan minimum benefits are not applicable.