415 or other limit on Cash Balance "contribution"

[TPApril]

Okay - Not experienced yet enough with Cash Balance Plans.

Just making sure - aside from using the Comp Limit, is there a limit on the amount of 'contribution' shown on a Cash Balance Participant Statement? I think not.

[John Feldt ERPA CPC QPA]

Not on their statement, no. The enrolled actuary tells the plan sponsor how much to contribute. The contribution is not limited to the comp limit, it is limited by code section 404 unless the plan sponsor is tax exempt. 

The participant statement tells the participant the benefit they have earned based on the terms of the plan document.

The assets in the plan are not equal to the value of the participant’s benefits and the contribution for the year is not required to be equal to the value of the benefits being earned for the year. 

[Bill Presson]

On 10/21/2023 at 8:03 AM, John Feldt ERPA CPC QPA said:

The assets in the plan are not equal to the value of the participant’s benefits and the contribution for the year is not required to be equal to the value of the benefits being earned for the year. 

IMHO, this is the hardest thing to grasp when first dealing with DB/CB plans, however once it's clear, it's always clear. But it's then extremely important to help the client learn. And that's one of the toughest parts of client service with DB/CB plans.

[C. B. Zeller]

For DC plans, 415 limits how much can go into a plan in a given year. There is no limit on how much can come out; the participant gets whatever was contributed plus any earnings.

For DB plans, 415 limits how much can come out of the plan at retirement. There are no limits on what can go in*, but generally it wouldn't make sense to put in more than would be allowed to be paid out. The actuary will help you determine a contribution formula that will get you to the desired retirement benefit.

*There is a limit on how much can be deducted, but that is not really the question here.

[Lou S.]

I could be wrong but I think what his is asking is assuming max compensation and funding for a maximum 415 benefit at retirement age, what is the annual level funding using reasonable actuarial assumptions given an employee's current age and future retirement date.

[Jakyasar]

If that is the case as Lou pointed out, on very simplistic approach (1st grade math), to get to roughly 3.4M (415 lump sum limit at 62 assuming a minimum of 10 years of participation and minimum 265k salary average), put in as the future value on the calculator, interest rate at 5.5% and number of years would be from current age to age 62 and do annual interest accumulation (this is compound interest but again who cares illustration here)

For example, if you are age 52 today, making a salary of over 265k+ and want to fund the plan for 10 years to maximize lump sum at 62, on average you need to contribute approximately 250k (could be different if you calculate beginning of year deposit vs end of year deposit)

Now for cash balance purposes, if you want to maximize, you can show a pay credit of 250k/year on the participant statement. Year 2 would show 250k plus the interest credit plus another 250k pay credit and so on. As others mentioned, contribution, in practicality, does not match the pay credit due some other factors like return on investments, IRS mandated segment rates etc etc etc.

As I said, this is a very very simplified version of the calculations. A lot more goes into though.

On a side note, on the participant statement, there is no limit shown, just what your document states - contributions made are not on the participant statements but on SAR/AFN to be provided to the participants. There are some programs out there that may insert "exceeded 415 limit". Everyone is different.

FWIW.