411 accrual limits to 415(b) max benefits

[DanEA]

A newly formed Cash Balance Plan has in the first year a 415(b) accrual limit of $275,000 x (1/10) = $27,500.  In the second year the 415(b) accrual limit is $275,000 x (2/10) = $55,000 which is double (assuming no 415(b) $lim increase.  Does the 133 1/3 accrual rule limit the second year accrual  to 133 1/3 times the first year accrual?

[Effen]

No

[DanEA]

On 5/15/2024 at 7:28 AM, Effen said:

No - Can you please explain the reason for your answer?

 

[John Feldt ERPA CPC QPA]

If the benefit formula in the plan is written, for example, to accrue a benefit payable beginning at retirement at a rate of $27,500 per year, and the participant accrued that same formula year after year, then they are accruing at a rate of exactly 100% of the actual rate that they earned in any prior year under the plan’s written benefit formula.

If, instead, the formula was written to be $5,000 per year for the first 5 years and $15,000 per year thereafter, then the 133-1/3 accrual rule is not met. Accruals in years 6 are thereafter are more that 133-1/3 percent more than the accruals in at least one of the prior years under the formula.

But fret not, you may amend the plan with a fresh start date instead and the adoption of the new formula can be designed to be a million times higher than the old formula and, if worded properly, not violate the 133-1/3 rule.