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Cash Balance Maxiumum


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HI, 

We do not do much work on cash balance plans. An actuary brought up the following:

A TPA that he works with set up a Cash Balance Plan. They are getting a maximum that is lower than the cash balance allocation per the formula. Does this sound right? Thank you.

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Not sure if it is a joke, but it is possible, depending on your crediting rate.  If you are using 30-year treasuries, or a very low crediting rate, when you accumulate at a low crediting rate, then discount at a higher PPA funding rate, your FT is often lower than your account balance.  Depending on your demographics, and the interest rates being used, this can result in a maximum deductible that is lower than the sum of the account balances.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Especially the younger the owner(s) compared to NRA, as the difference between the (low) ICR and (higher) funding rate compounds over a longer period.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Taking all of the above into account, of course it doesn't sound right.  And, site unseen, I'd wager a fair amount that it is not so.  But it *is* possible.  Without a whole bunch of information there is no way to tell.

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I figured this was a brand new plan, maybe with a 3% or smaller ICR, and then the employees are all more than 20 years from NRA, so their benefits are getting discounted at 3.29% for Dec. 2021.   So you end up with a smaller normal cost than the allocation credit, because all those years at 3.29% are going to overcome the 3.00% rate expected to tack on for such a long time.

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Don't forget about the ability to use 430(i) assumptions to determine the maximum deduction.....

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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