Definition of Benefit In A Cash Balance Plan

[metsfan026]

What's the best way to word the definition of the pay credit in a Cash Balance Plan, if you want to allow it to rise each year?  I'm not an actuary, but I've seen charts that show limitations for Cash Balance contributions based on their age (like a 40-year old may only be able to contribution $100,000).

I know it's not the 415 limitation, so just trying to figure out the best way.

I apologize for all of the questions, I'm just trying to learn more about these plans so I can be more helpful to the people in my office.

Thanks in advance!

[Effen]

35 minutes ago, metsfan026 said:

I know it's not the 415 limitation,

but it is.

Not really sure what you are asking?  Can you provide an example of what you are concerned with?

[Lou S.]

1 hour ago, metsfan026 said:

I know it's not the 415 limitation, so just trying to figure out the best way.

 

As Effen correctly points out it is the 415 limit driving it. Specifically the lump sum limits on paying out the 415(b) limit, often at age 62.

[C. B. Zeller]

I have seen plans written where the pay credit is defined as the amount that will make the hypothetical account balance equal to the 415 maximum lump sum at the participant's current age as of the end of the year. Sometimes it's even a checkbox option in a preapproved plan. I'm not sure I would use that option though - I think I would prefer a traditional DB formula at that point.

[CuseFan]

If it's an owner-only plan and you want to guarantee maximum benefits all along the way, use a traditional formula as CBZ noted. Actually, even with employees who you want under a CB design, you can have a traditional DB and CB mix. Otherwise, set the CB credit at the entry age max for your defined NRA (62 or 65) and periodically amend/update the formula as desired w/o being locked into increases. The owner can always use the funding rules/max deduction range to increase actual contributions, they just don't automatically go to owner (right away). Then pick and choose optimal occasions every few years to allocate additional amount(s) to owner(s) when testing demographics are most favorable. DB/CB plans have much more flexibility than utilized by those who want them to act like DC plans as much as possible.

[Jakyasar]

I agree with Cusefan's approach. Just add additional contributions under maximum deductible rules (it will increase every year even with HCE limitation for formula adjustments - cushion limitations) and adjust the pay credit every few years. This is a good approach/control if you want to limit the increase in pay credit and the accrued benefits at end of each year to 415 limits. Just my 2 cents.

[Nate S]

You can define the pay credit as being higher than the current year limit, just be careful that you are not trying to fund that "excess" portion.  Also, be aware that any freeze won't eliminate any unlimited benefit that a 415 limit increase can unlock, and you can create the need for employee allocations as a result.