# How the contribution range is set

> The minimum required and maximum deductible contribution, and why there is a range.

Source: https://askactuary.com/contribution-range  
Author: Mike Rutkowski, FSA, EA, MSPA

Each year the plan's actuary certifies a contribution range. The employer must deposit at least the minimum and can deduct up to the maximum.

## The short version

- The **minimum required contribution** covers the benefits earned this year plus a share of any shortfall. If assets exceed the cash balance, benefits earned are offset by the excess. The minimum can be $0.
- The **maximum deductible contribution** adds a funding cushion, so it is often well above the minimum.
- The pay credits in the plan document define the target. The range is what the tax rules allow around it.
- Contributing more than the minimum builds a cushion that can lower later minimums.

## Three numbers each year

**The range, conceptually**

- **Minimum required contribution:** must deposit
- **Pay credits for the year (the plan's target):** usually inside the range
- **Maximum deductible contribution:** can deposit and deduct

As an example for a plan that has existed for 5 years (with a $100,000 annual pay credit), a realistic scenario is: minimum required $40,000; recommended contribution $100,000; maximum recommended contribution $250,000.

### The minimum

Under IRC section 430, the minimum required contribution is roughly:

- the value of benefits earned this year (the **target normal cost**), which in a Cash Balance plan is close to the year's pay credits, plus
- one-fifteenth of the funding shortfall (if any), adjusted each year
- if there is an excess instead of funding shortfall, benefits earned are reduced by the excess (lowering the minimum, potentially to $0)

Missing the minimum triggers an automatic 10% excise tax on the unpaid amount, so the minimum should be funded timely.

### The maximum

Under IRC section 404(o), the maximum deductible contribution starts with similar liabilities, the **funding target** (the interest rates used are slightly different, so the liabilities are generally a little larger than used in the minimum valuation) and adds a cushion: 50% of the plan's funding target. That cushion is why the maximum is often far above the minimum, especially as the plan ages. The general formula for the maximum is:

- the **target normal cost**, plus
- the **funding target**, plus
- the **cushion amount** (generally 50% of the funding target), minus
- the value of **plan assets**

## Why a range helps owners

- **A good year:** optionally deposit toward the maximum, take a larger deduction, and build a cushion.
- **A slower year:** deposit closer to the minimum. A cushion built earlier can reduce it further, if needed.
- **The plan still has to be funded.** A range offers flexibility within a year. The actuary may recommend prospective formula changes based on the funding amount chosen. See [Timing and changing contributions](https://askactuary.com/contribution-timing).

## When there is also a 401(k)

**EXTREMELY IMPORTANT:** When one employer sponsors both plans, the deduction for employer contributions to the 401(k) side is generally limited to 6% of eligible pay (reduced from the normal 25% limit). Employee salary deferrals don't count toward that 6%. Plans covered by the PBGC are exempt from this combined limit (ie, the 401(k) deduction limit remains 25%) See [Pairing with a 401(k)](https://askactuary.com/cash-balance-and-401k).

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Educational information only. Not tax, legal, or investment advice, and not an actuarial valuation.
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