415 limit for Cash Balance Plan

[Guest Deflector]

I have an Owner who is age 52 in a new Cash Balance Plan and the NRA is 62. On what basis do you calculate the contribution credit for the 415 limit? Is it based on attained age or NRA?

For example:

If the 415 lump sum limit at age 52 is around $130,000 and the 415 lump sum limit at age 62 is around $230,000, what is the maximum contribution credit we can give our Owner in 2008.

If it is based on age 62, then our minimum required contribution is much higher than the maximum we can pay out, and if the plan ended we would be well overfunded.

If it is based on age 52, then our maximum this year is $130,000 and next year will be closer to $140,000. This will give us an increase contribution each year, which removes a smooth consistant minimum required contribution. Also I think it will give us a lower funding percentage. Of course in the future we could have them put in more than the minimum to smooth this out.

[Mike Preston]

52

[Effen]

Mike, why do you say 52?

In a traditional db there wouldn't be any issue funding the benefit at NRA (62). I agree that if the participant was entitled to a distribution prior to NRA you would need to consider the 415 max at the age of distribution and the plan would most likely be overfunded, but I think funding for the benefit at age 62 is acceptable.

Under your approach the required contributions would rapidly escalate as the participant got older.

Then again, maybe this is a case where the minimum is artificially low and the actuary has an obligation to calculate a more reasonable level funded contribution, assuming it is less than the maximum deductible.

[SoCalActuary]

Mike, why do you say 52?

In a traditional db there wouldn't be any issue funding the benefit at NRA (62). I agree that if the participant was entitled to a distribution prior to NRA you would need to consider the 415 max at the age of distribution and the plan would most likely be overfunded, but I think funding for the benefit at age 62 is acceptable.

Under your approach the required contributions would rapidly escalate as the participant got older.

Then again, maybe this is a case where the minimum is artificially low and the actuary has an obligation to calculate a more reasonable level funded contribution, assuming it is less than the maximum deductible.

It is the nature of unit credit funding to have an increasing cost pattern. The additional benefit earned each year is more expensive than last year, because of age & cola on 415 limits. If that is a problem, then cut back on future benefits.

Also, the 50% cushion matters here. Now you can fund for more than the 415 limit.

[Mike Preston]

Mike, why do you say 52?

Huh? The guy is saying that the amount he wants to fund, at age 52, is the full, unreduced value of 1/10th the dollar limit, payable as a lump sum at age 62. Repeat: the lump sum payable at 62 is what he wants to fund at age 52. Surely you missed this point to be questioning what is the appropriate amount to fund. I know you well enough to know that has to be the case.