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Cash Balance Plan
What Is It?
A Cash Balance Plan is a sophisticated retirement plan design that allows high income, high net worth business owners and other key employees to shelter income well beyond the amount currently available under a traditional 401(k) profit sharing plan. The basic plan design uses a modern version of a defined benefit plan, known as the Cash Balance Plan, in combination with a traditional 401(k) profit sharing plan. In many respects it looks and feels like a profit sharing plan but with potentially much higher contribution limits.
Who is an Ideal Candidate?
Professionals and successful business owners who meet one or more of the following criteria:
- Are interested in substantial tax deductions
- Have substantial company profits
- Can commit to a significant annual contribution
- Can tolerate a degree of complexity in their plan’s design
- Are willing to contribute a basic contribution to staff of 5% to 7.5% of pay
- Are “boomers” trying to accelerate retirement savings
- Are business owners that may be looking for a tax favored buyout strategy
- Are looking to protect assets from creditors
- Are interested in rewarding a select group of employees
Frequently Asked Questions:
What can a cash balance plan do for high income business owners that a 401(k) profit sharing plan cannot?
A Cash Balance Plan can allow for much higher contribution amounts. Annual participant contributions to a 401(k) plan are limited to no more than $49,000 ($54,500 if age 50 or over). Cash Balance Plans on the other hand have no contribution limitations and are only limited by the cost of a maximum projected benefit at retirement permitted by Congress, currently $195,000 per year at age 62.
Won’t it be more expensive for other eligible employees?
Possibly, in order for a business owner to achieve the $49,000/$54,500 maximum within a 401(k) plan, it will typically require a minimum employer contribution of approximately 4.5% of wages if the plan has a “cross tested” profit sharing feature; much more if the plan is not cross tested. A retirement program which incorporates a Cash Balance Plan will typically require a minimum annual contribution of 5.0% to 7.5% of eligible participant wages. Employee demographics and other factors may also have an impact.
What are other key differences from a defined contributions plan?
Unlike a 401(k) profit sharing plan, a Cash Balance Plan guarantees a cash balance benefit at retirement. This means that the earnings credited to the account each year are guaranteed by the plan sponsor. Annual contributions may have to be adjusted to reflect actuarial investment gains or losses. Steady and conservative annual performance, as opposed to maximizing return (and risk), is the goal. Regulations require an average rate of return of 4.0% to 5.0%.
Because of the guarantees associated with a Cash Balance Plan, actuarial certification is required each year by an enrolled actuary. Because it is a defined benefit plan, the law may require the plan to be covered by the Pension Benefit Guarantee Corporation (PBGC).
As a defined benefit plan, the plan may lack the funding flexibility of a profit sharing plan and requires a long term commitment from the employer. Extenuating business circumstances may allow the plan to be amended, frozen or terminated to curtail plan benefits and costs.
Sheakley will help you get it done!
Contact Carrie Lucas
Sheakley Pension Administration
1-800-877-2053 ext. 2384
Email: clucas@sheakley.com |
