Maximum 415 Accrued Benefit for Cash Balance Plan

[ac]

We are setting up a Cash Balance Plan with two participants.  One participant is age 41 with an average annual compensation (3 year) of $49,263 at 12/31/2023 and she has 3 years of service with the employer.  Interest credit rate = 5% and Actuarial Equivalence is 5% and '23 417 AMT.

How do others calculate her maximum account balance at the end of the first year of the Plan? 

My process is:

415 Maximum Accrued Benefit as of 12/31/2023 payable at NRA (62) as a life annuity = the lesser of 1) Comp Limit = $49,263x(3/10) = $14,779 or 2) $ Limit = $265,000x(1/10) = 26,500.  415 Maximum Accrued Benefit = $14,779 payable as a life annuity at age 62 (NRA).

Based on the 415 Maximum Accrued Benefit, her Account Balance as of 12/31/2023 must be limited to ($14,779 x a62) / 1.05^21 =  $71,779.  

My understanding is that the Accrued Benefit under the plan is the actuarial equivalent of the Account Balance.  The Accrued Benefit cannot exceed the 415 Maximum Accrued Benefit.

I think this is pretty straight forward, but we took over a plan from a large TPA/Actuarial Firm who seemed to ignore this.

Is there something I am missing?

 

 

[Bri]

Don't forget that if 5.5% and the AMT provides a lesser lump sum than the plan's AE factors, then that will override your prior number.

And the one-year participation limit before age 62 gets reduced down below the 14,779 as well, to something more like 7,243 at age 41.

[C. B. Zeller]

There is no requirement that the hypothetical account balance be limited to the 415 max lump sum. 415 controls what can actually be paid out of the plan, so if the hypothetical account balance exceeds the maximum lump sum on the actual distribution date, then the entire hypothetical account balance could not be paid. But purely from a plan design perspective it doesn't matter.

[Calavera]

Just now, C. B. Zeller said:

There is no requirement that the hypothetical account balance be limited to the 415 max lump sum. 415 controls what can actually be paid out of the plan, so if the hypothetical account balance exceeds the maximum lump sum on the actual distribution date, then the entire hypothetical account balance could not be paid. But purely from a plan design perspective it doesn't matter.

Unfortunately, this is not correct. Under the current regulations you need to satisfy the 415 limitations on benefits paid and on benefits accrued during the year.

 

[Calavera]

2 hours ago, ac said:

Based on the 415 Maximum Accrued Benefit, her Account Balance as of 12/31/2023 must be limited to ($14,779 x a62) / 1.05^21 =  $71,779.  

I agree. 

[C. B. Zeller]

19 minutes ago, Calavera said:

Unfortunately, this is not correct. Under the current regulations you need to satisfy the 415 limitations on benefits paid and on benefits accrued during the year.

Yes, I agree that the accrued benefit has to be limited to 415. However that does not restrict the hypothetical account balance.

[ac]

Thanks for your input CB Zeller.  However, the definition of the Accrued Benefit under the Plan is the actuarial equivalent of the Hypothetical Account Balance.  Under the situation above, if the Hypothetical Account Balance exceeds $71,779, then the Accrued Benefit (actuarial equivalent of the Acct Balance) exceeds the 415 maximum benefit at 12/31/2023.

I agree that the Hypothetical Account Balance at 12/31/2023 does not need to be limited to the lump sum value of the 415 Maximum Benefit payable at 12/31/2023.  

[Jakyasar]

71,779, depending on what actuarial assumptions you use for the CB, may not generate an AB that is at 415 limit however, since you know that for 2023, 71,779 is the max 415 limit, you can simply stick to it but can deposit more and apply for future years, 404 certainly allows it. But the client will need to be explained that, just because they put in more than the 415 limit does not mean what they deposited can be paid out.

Big difference between increasing the hypothetical balance versus increasing the contribution under 404.

My 2 cents are always deal with deductible limit first and then increase the pay credit in the future to match.

FWIW