Cash Balance Formulas when Earnings Not Known

[ERISAAPPLE]

How do you advise clients to design their CB formula when they don't know their earnings until after year end?  I am looking particularly at clients that are not corporations, such as partnerships and LLCs taxed as partnerships.  It is a problem because they need to adopt their plan or amend their formula by the end of the year, but they don't really know their earnings until after year end. 

[Bill Presson]

For the first year, it's true that they need to adopt the plan by the end of the year. But if they are so worried about the number, they likely aren't making enough to have a plan.

As to amending the formula, that needs to be done early in the year before earning the right to the accrual and I wouldn't recommend that be done too often.

It's just possible they aren't a good client.

[Mike Preston]

There is precious little difference between a CB plan and a traditional plan in this case. Can the client establish a relationship between income and desired contribution?  Such as 33% of net income before DB deduction is recognized?  If so, the CB formula is trivial: 50% of plan compensation.  The same thing can be accomplished with a traditional unit credit formula, with a specific percentage based on the age of the participant.  Is there a minimum they are comfortable with?  What about a max?  Is the contribution pattern expected to shift? Anything can be designed for.  If math isn't the designer's forte then a schedule can be prepared: e.g., if plan compensation is between $0 and $50,000, the amount necessary to satisfy 401(a)(26); if between $50,000 and $75,000, 50% of plan compensation; if between $75,000 and $150,000, $37,500 plus 150% of plan compensation in excess of $75,000, etc., etc.  The exact same thing can be done in a CB plan as a traditional unit credit plan. Want to frontload contributions?  Easy: establish a past service credit (can be done in either a CB plan or a traditional plan) and target the 404 max the first one or two years, then lower the formula to 2/3rds of ultimate goal to ensure contribution can be, if necessary, zero in years 3 and 4.  It really is trivial.

[ERISAAPPLE]

Can the sponsor adopt an 11(g) amendment?

[Mike Preston]

Not for deduction purposes.

[Mike Preston]

I should also point out that I agree with Bill. A business that does not know its profits, or what it intends to do with that profit, by 12/15 has some very lazy accounting behind the scenes and is not likely a candidate for a qualified plan.