Cash Balance Plan document requires a 78% of pay contribution

[CharlesLeggette]

Single employee Plan. Owner is age 49, NRD is age 62, end-of-year val.....so Target Normal cost is about $125,000. 78% of his pay however is $159,900. So $159,900 is the IRC 430 amount. Does IRC 430 required contribution amount trump TNCost calculation and would it be deductible??

[Lou S.]

I'm confused by some of your terminology.

While the goal is often to have the employer contribution = to the contribution credit, it is not a requirement they be the same.

Is this the 1st year of the plan?

[CharlesLeggette]

I just took it over, but it is the first year of the Plan.

[My 2 cents]

I was just wondering how IRC Section 415 would affect a cash balance plan with so rich a pay credit.

1. Would the first year's pay credit be limited sufficiently so that it would not grow, by retirement age of 62, using the plan's interest credit rate, to more than the lump sum equivalent, using 5.5% interest, of 1/10th of this year's 415 dollar limit?

2. Would the account balance not be allowed to grow, over the years, to more than the lump sum equivalent, using 5.5% interest, of a straight life annuity at retirement age equal to the lesser of the 415 dollar limit or 100% of the highest three-year average compensation (with each year's compensation for that purpose limited by 401(a)(17))?

I once took over a plan freshly spun off from a plan we did not provide services to, otherwise I would not understand how you could take over a plan in its first year. I presume, however, that you do not have to do such takeover things as match someone else's results.

[Effen]

How do you take over a plan in the first year? That would set off a lot of alarm bells in my head.

The amounts you stated don't seem unreasonably high to me, assuming a fairly low interest crediting rate.

I believe the theory many actuaries use to justify the deduction of the service cost in year 1 is that it is the at-risk funding target, assuming the plan offers immediate lump sums. If you search this board and the COPA board, you should find some discussions. I believe the IRS has agreed (although maybe not formally) that this is ok.