Target Defined Benefit and Cash Balance Contribution Percentages

This article will show you how to calculate an annual target defined benefit plan contribution. A “Target” contribution is also often referred to as a “Base” contribution or a “Recommended” contribution.

Below is a table that has the funding levels based on age, W2 compensation or business profit. This table can be used for all entity types, including S-Corps, C-Corps, partnerships and sole proprietors. We always encourage you to fund at the target amount, which will keep your plan from being overfunded or underfunded.

But remember that the table is used as a guide. Funding ranges will vary in large part as a result of prior contributions and investment returns. But this is a good starting point.

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Here is how to use the table:

  1. Find your age on the left. This is your age on December 31st of the given year.
  2. If you are an S-Corp or C-Corp, you are required to issue yourself a W2 for the services provided. You will then want to take your expected W2 and multiply it by the percentage in the column labelled “Contribution% for W2“.
  3. If you are a sole proprietor or partnership, you will NOT issue yourself a W2. You will then take your expected business net income and multiply it by the percentage in the column labelled “Contribution % for Sole Prop“. Business net income is defined as your business revenues less deductible business expenses.
  4. The amount that you calculated in #2 or #3 above is subject to the maximum amount listed in the last column.

Items to note:

  • The contribution percentages are estimates. Actual amounts vary based on actuary review and the client’s specific situation. 
  • If you are an S-Corp or C-Corp, you can adjust your W2 up or down to achieve the desired results. This assumes that your W2 represents a reasonable wage for the services provided.
  • Because sole proprietors and partnerships do not issue W2s to owners, these entities have less flexibility when it comes to target funding. So ensure that proper tax planning is complete to try to achieve the desired funding level.
  • The table also assumes that your investment returns are consistent with your interest crediting rate (approximately 5%).
  • You may contribute amounts higher lower than the table. However, your plan will be subject to overfunding or underfunding which will impact future funding levels.
AgeContribution % for W2Contribution % for Sole PropMaximum
3026%20%           $72,429
3128%20%           $76,095
3229%21%          $79,949
3331%22%          $83,999
3432%23%           $88,256
3534%24%           $92,730
3635%25%           $97,431
3737%25%         $102,375
3839%26%         $107,572
3941%27%         $113,032
4043%28%         $118,773
4145%29%         $124,807
4248%30%         $131,151
4350%31%         $137,820
4453%33%         $144,831
4555%34%         $152,201
4658%35%         $159,948
4761%36%        $ 168,094
4864%37%         $176,658
4968%38%         $185,660
5071%39%         $195,126
5175%41%         $205,077
5278%42%         $215,540
5382%43%         $226,539
5487%44%         $238,105
5591%46%         $250,265
5696%47%        $263,050
57101%48%        $276,492
58106%49%        $290,625
59111%51%         $305,483
60117%52%         $321,107
61123%55%         $337,534
62129%59%         $354,807
63126%58%         $347,830
64124%58%         $340,695
65121%57%         $333,374
66118%56%         $325,863
67116%56%         $318,170
68113%55%         $310,265
69110%54%         $302,144
70107%54%         $293,812

How does overfunding impact my cash balance plan?

An overfunded cash balance plan occurs when the assets in the plan exceed the present value of the expected retirement benefits. This situation can arise due to various factors such as excellent investment performance, lower-than-expected inflation, and increased life expectancy. 

While an overfunded pension plan is generally considered favorable, it does not necessarily lead to increased participant benefits and may present challenges such as tax implications and restrictions on withdrawing the excess funds. A cash balance plan is a type of defined benefit plan that defines the benefit in terms more characteristic of a defined contribution plan

Paul Sundin

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