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Mister Met

415 limit - Cash Balance

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How can I determine if a cash balance plan's benefit is in excess of 415?

Do we just look at the account balance when they retire, or limit the service credit for each year (or both?)

Example, the plan's service credit for someone age age 50 is $125,000, NRA is 62.

Max 415 annuity at 62 is $200,000/year at age 62.

I can determine the max 415 lum at retirement (calculate LS at 5.5%, etc.)m but how do we do it for an individual year?

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Welcome to the world of 415 calculations.

You do the math in your plan document for a specific annuity starting date.

This requires knowledge of the plan's actuarial assumptions, the 417(e) mortality table in effect, the potential 417(e) maximum distribution (only when interest rates are much higher than today), the pay history, and potentially the normal form of payment.

Remember that you can have a nominal accrued benefit which exceeds the 415 limit for distribution in a cash balance plan, so long as you don't pay it out and you don't use the excess benefit for funding calculations.

From this information, you can see that you have some research to do.

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Well I've run across an example that I question. It is apparent to me that not everyone does this the same for valuation purposes. Anybody willing to calculate this one and lay out the details?

First plan Year (calendar 2011) (415 dollar limit $195K)

NRA and ARA 65 (yes, 65 not 62)

Age 57

Average Comp (Hi 3) $245K

Actuarial equivalence AMT (post retirement only) and 5.5% interest

Cash balance interest credit 5%

Assumed payment form: lump sum

The pay credit allocated is $170,000. I think this exceeds the 415 limit. Anybody disagree?

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Well, let's see. The 415 limit at 57 is as follows (presuming someone will check my math) using 5% and 2011 Applicable.

(155.4878 / 172.1770) * 195000 * .783526167 = 137977.83 (11498.15 monthly)

Therefore, 1/10 is 1149.82 and the APR at 57 using 5.5% and 2011 Applicable is 163.6075. This creates a lump sum in excess of 188000.

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Thank you.

I agree with your calculation on a current lump sum basis.

But, for valuation purposes, assuming retirement age 65, the annual accrued benefit it seems to me of a $170,000 allocation equals:

170,000 * 1.05^7/138.6807*12=$20,698. Since this exceeds $19,500, is there an issue based upon the assumption of an age 65 ARA?

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Thank you.

I agree with your calculation on a current lump sum basis.

But, for valuation purposes, assuming retirement age 65, the annual accrued benefit it seems to me of a $170,000 allocation equals:

170,000 * 1.05^7/138.6807*12=$20,698. Since this exceeds $19,500, is there an issue based upon the assumption of an age 65 ARA?

By assuming that the participant will retire at 65, you are funding for a max lump sum at that date. Presumably you are using the 5.5% and applicable mortality.

So make that assumption, because you are the actuary. But that does not change the fact that the maximum account is higher.

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I agree that the maximum account is higher than $170K

I think what we are saying is that an allocation of $160K or $170K or $180K would all be within 415 on a current payout basis, but would all produce the same normal cost since the accrued benefit would need to be limited to $19,500 in any case. Based on this particular fact pattern that is. Interesting.

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