New Cash Balance Plan

[Guest The Pension Kid]

So... I'm going in circles on figuring out the 415 maximum to figure out the level I should be trying to hit for the owner in a new Cash Balance Plan.

I've got a 45 year old owner that I'm trying to max out (I'll worry about the NHCE percentages later). The owner makes well over the $225,000 comp limit. Calendar year 2007, NRA 65 with no early retirement provisions. Actuarial Equivalence will be equal to GATT

Can anyone tell me what the owner's limit would be (*hopefully* with calculations)? I mean, what is the max the owner can put in, moreover what the limit that I should be trying to hit?

Any and all assistance will be greatly appreciated.

[Guest Texas_Acty]

I mean, what is the max the owner can put in, moreover what the limit that I should be trying to hit?

The maximum benefit is the 415 limit.

The maximum deductible contribution is whatever will result from a Code Sec. 404 valuation based on your plan's demographics and actuarial assumptions.

[JAY21]

The amount you put in is determined by your funding assumptions just like a traditional DB plan. If you're designing this from scratch and if you're talking about the theoretical account balance for the owner, I guess you have a decision to make as to whether the CB formula you are putting in would immediately produce a theoretical account greater than the current 415 limit accrual, or equal to or less than. Obviously they couldn't immediate distribute the full CB account if currently greater than 415 limits, but if he's not expected to terminate anytime soon you probably could feel reasonably confident of future COLAs on the 415 limit and the 415 limit present value will of course increase with age as well. Bottom line is the 415 limit is calculated the same as a traditional DB plan and then compared to the CB theoretical account balance to see if it's fully distributed.

That said; maybe a 1st year 415 DB limit pv accrual for someone age 45 (NRA of 65) under current interest rate environment, and given your plan A.E. are GATT (i.e., interest less than 5.5%), might be in the ballpark of: (1.055^-20)(135.75926- 94 GAR (blended), SLA, 65))(180,000/12)(1/10)=$69,793.

That doesn't mean you're restricted to funding this amount if your funding assumptions produce a higher number (with projected and accrued benefits limited to 415 limit). Under PPA 2006 if the interest rates change OR if/when your plan doc interest rates (GATT) become higher than 5.5% you will have a different 415 result. You are not going get a definite limit here that anyone can tell you as it's still subject to your funding assumptions and funding method though knowing where the 415 limit is at currently might help you in some respects in design decisions.

[Guest The Pension Kid]

That said; maybe a 1st year 415 DB limit pv accrual for someone age 45 (NRA of 65) under current interest rate environment, and given your plan A.E. are GATT (i.e., interest less than 5.5%), might be in the ballpark of: (1.055^-20)(135.75926- 94 GAR (blended), SLA, 65))(180,000/12)(1/10)=$69,793.

Thanks JAY. that was the same calculation I was coming up with.

[FAPInJax]

I believe the calculation can be different. Assume a 180,000 415 limit (which equates to 1500 / month). Calculate the maximum monthly benefit payable at 45 (using 5% and 94 GAR for assumptions) which ends up being 498.26 (give or take a couple of pennies)(the actual factors are 152.573/199.8527 and 5% discount for 17 years). The present value of an immediate annuity at that age using 5.5% GAR assumptions produces a lump sum of 93,588.

This is drastically different than the prior calculation but seems to be supportable based on the definitions under 415. This is due to the fact that the benefit reduction rules require a reduction based on 5% but the lump sum rules use 5.5%.

[zimbo]

That said; maybe a 1st year 415 DB limit pv accrual for someone age 45 (NRA of 65) under current interest rate environment, and given your plan A.E. are GATT (i.e., interest less than 5.5%), might be in the ballpark of: (1.055^-20)(135.75926- 94 GAR (blended), SLA, 65))(180,000/12)(1/10)=$69,793.

Thanks JAY. that was the same calculation I was coming up with.

I agree with Frank. It seems that if you fund greater than the equivalent of the 415 accrual you may even be running into non-deductible contributions. Of course, you could fund the proper equivalent accrual using different actuarial assumptions to get a higher cost, but beware of potential excess assets.

I have been using Unit Credit for funding these new start up cash balance plans. What have others been doing? In year one, with Unit Credit you can get a perfect match between the cash balances and the accrued contribution if you use the same assumptions for funding as for cash balance accumulation. Of course, after year 1 it will break down as you begin to have actuarial gains and losses. Since these plans put benefits in lump sum terms in the eyes of the client and participants, it seems that our goal is to keep the assets and liabilities as close as possible throughout the life of the plan. Quite a challenge though.

[Blinky the 3-eyed Fish]

I've got a 45 year old owner that I'm trying to max out (I'll worry about the NHCE percentages later). The owner makes well over the $225,000 comp limit. Calendar year 2007, NRA 65 with no early retirement provisions. Actuarial Equivalence will be equal to GATT

With a retirement age of 62, you would produce a higher maximum than with 65.