Case Study: Cash Balance Maximum Contribution Projections

ChartA couple of weeks ago, we released a chart estimating maximum contribution credits for Cash Balance Plans at different ages and compensations.  For example, the chart shows that a 55-year-old has a 415 Lump sum limit of $169,823 whether he makes a compensation of $75,000 or $245,000.  Assuming an interest credit of 5% per year, will he exceed his 415 limit and be forced to stop or reduce his contribution credit at some point in the future?

We have since prepared this study, which projects the maximum contributions from plan inception to retirement age at different scenarios using different levels of pay and past service.  The following study is designed to give participants an in-depth look into their future contributions. In the case of the 55-year-old with compensation of $245,000, we projected that he can make the $169,823 of contribution credits up to age 62 (for 8 years) with room to spare.  His maximum 415 Lump Sum Limit at age 62 is $1.9M and his hypothetical account balance if he continued to make that level contribution of $169,823 will only be $1.6M.  He could in fact increase his contribution to have a higher account balance at retirement. (See Below)

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What if his compensation was only $100,000 and he only had 2 years of past service when he started the plan? He still would be able to have a contribution credit of $169,823 but in the 4th year, the contribution would be limited to $107,782 and gradually decrease to $46,440. (See Below)

(Click to Enlarge)


The following chart summarizes the projection analysis of cash balance maximum contributions for varying ages, past services, and compensations. It is designed to give you an idea of how much and how long maximum contributions could be made in a cash balance plan. It demonstrates that participants may only be able to make maximum contributions up to a certain point.

How to use the chart: For example, an owner at age 50 with 5 years of past service and compensation of $245,000 at plan inception (ages are at plan year-end).

summary In the second section of the chart, look up age 50. He can make a contribution for 13 years if he retires at 62. Under the $75,000 compensation column and “Yr” we see that his $132,117 of maximum contribution will decrease in the 7th year to $96,107 (in the row “Past Service = 5”)

Note: There are two maximum contributions shown in the age 60 & 65 sections. The lower amounts are the maximum contributions when Past Service = 2 yrs. and compensation is $75,000.

Now, let’s take an employee who is 55 years old with two years of service, and a compensation of $75,000.

Assume that there are two scenarios:

In scenario 1, there is no increase in the dollar limits or earnings

In scenario 2, the participant will receive a 10% annual increase in earnings and the dollar limits will increase at a rate of 2%/year

Currently, the participant’s 415 Limit is $169,823. At first glance the participant thinks he will be able to make a the maximum contribution of $169,823 per year until retirement…sounds good right? However, the contributions are misleading.

Scenario 1

The participant will only be able to make the max contribution for the first year of participation, at which point the contribution levels will decrease.

(Click to Enlarge)

Scenario 2

The participant will be able to make the max contribution for the first year of participation, at which point the contribution levels will decrease slightly, and then return  to the $169,823 level.

(Click to Enlarge)

So why are the contributions decreasing?

The contributions are decreasing because the 415 Limit considers the lesser of the dollar limit (195,000 actuarially reduced to attained age) and the compensation limit.  The Dollar limit is accrued at 10% per year of participation.  The Compensation limit is accrued at 10% per year of service.   In this example, in the first year the Dollar limit is $1,005 per month and the Compensation limit is $1,250.  The 415 limit is $1,005 and when converted to a lump sum is $169,823.  In the 2nd year, the compensation limit is now lower than the dollar limit and the 415 maximum lump sum goes down.

In general, we only need to realize that in recommending the maximum 415 lump sum contribution, the danger on exceeding the 415 in later years will most likely occur when the principal is making less than $100,000 and/or only has 2 years of past service at plan inception.

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