Cash Balance Plan

The Circumstance

Given recent economic events, many business owners have seen their nest eggs shrink, and with recent and potential new tax laws taking effect soon, business owners may be required to pay more in taxes.

Defined contributions (DC) 401(k) plans limit the amount a business owner or highly compensated employee can defer, and the amount employers can contribute. As many business owners near retirement, there is growing concern that sufficient retirement savings are unattainable.

The Solution

For owners who want to optimize their retirement plan strategy, one possible solution is to establish a cash balance plan alongside their existing 401(k) plan. A cash balance plan is a defined benefit (DB) plan with features that resemble a DC plan.

Aside from potentially realizing increased contribution amounts with a 401(k) plan and cash balance plan, there are many benefits to having a DB and DC plan with the same provider. These include, for instance:

Having a dedicated service team

Combined benefit statements

Streamlined data collection

Potential savings on administration cost

Plan Advantages

The advantages of a defined contribution and cash balance plan (DB/ DC combo plan).

  • Companies may be able to contribute more than the DC limits for benefit to owners and highly compensated employees. In fact, DB tax-deductible contributions may be three or four times more than the DC plan limits.
  • Earnings on investments are generally not taxable to the employer.
  • A potentially effective tool to attract and retain valuable employees. Can provide for accelerated retirement savings (by allowing larger contributions and recognition of past service).
  • Benefits accrued under cash balance plans are generally insured by the Pension Benefit Guaranty Corporation.
  • A potentially effective tool to attract and retain valuable employees. Can provide for accelerated retirement savings (by allowing larger contributions and recognition of past service).

Plan Benefits

Benefits of a cash balance plan or employees.

  • May allow for greater retirement benefits as compared with a DC plan alone, especially for highly compensated employees and owner-employees.
  • Provides a defined monthly benefit or lump sum based on the account balance at retirement.
  • Cash balance plans are tax deferred until benefit payment(s) begin (monthly annuity payments or a lump-sum distribution.)
  • Cash balance benefits are generally portable.
  • ERISA protects qualified plan assets from creditors in the event of a lawsuit or bankruptcy.
  • Participants do not bear the investment risk, and benefits are guaranteed.
  • Cash balance plans are typically easier for participants to understand than a traditional DB plan.

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