Cash Balance %pay needs stable income ?

[John J]

It's clear a cash balance plan contribution can be set to be a percentage of pay (with I guess limits by age). Why is the usual advice for 'defined benefit' that business/owners income be stable still applicable ? What happens with a one person business that has highly variable income and sometimes looses money for the year ? 

[JJRetirement]

John,

What you refer to as the cash balance plan contribution (a percentage of pay) is really a pay credit or accrual that defines what is credited to the hypothetical account balance for the participant.  That is very different from the minimum required contribution for funding purposes, which could be higher or lower.  

I think "the usual advice" you refer to is that having a defined benefit plan if income is volatile may not be advised because a contribution could be required when there isn't enough income to support it.  

 

 

 

 

[CuseFan]

and if you haven't had a long enough history of higher earnings then you might run into 415 limitations as well

[SoCalActuary]

All the variable effects of income are easily managed if you make the commitment to be 110% funded.  Cash balance has the advantage that benefit accrual is low when income is low.  But with the wide range of contribution requirements and deduction limits, you can still get good deductions without high earned income, at least for a limited period.

I will take any of your variable income clients that you don't feel comfortable handling. (joke)

[John Feldt ERPA CPC QPA]

Yes, it is a common myth that CB plan sponsors must have some guaranteed income available for the plan for a period of several years.