Maximize Your Retirement Savings and Reduce Tax Burden

​

Cash balance (CB) plans are a powerful tool to boost retirement savings while strategically reducing taxable income for small businesses. Here's how CB plans can help your company achieve its financial goals:

​

Cash Balance Plan Basics

 

• Higher Contribution Limits: CB plans allow for higher contributions than 401(k) plans. CB plans are a great option for small business owners looking to accelerate their retirement plan savings. See here for estimated CB plan contributions limits.

• Tax Benefits: Contributions to CB plans are pre-tax and lower the company’s taxable income. The large contribution amounts allowable in a CB plan, result in significant tax savings. 

• Ease of Understanding: CB plans are defined benefit (DB) plans. The difference between a CB plan and a traditional DB plan is that CB plans express the plan benefit as an account balance while traditional DB plans express the plan benefit as a single life annuity. This feature of CB plans provides participants with a better understanding of their plan benefit value. 

• Cash Balance 401(k) Combo Plans: CB plans are easily combined with a company’s 401(k) Plan. Our office designs plans that maximize CB benefits to owners and minimizes employee cost. This allows owners to have the tax benefits of a CB plan while reducing the funding risk. 

• Consistent Account Balance Growth: CB plan account balances grow according to the plan’s interest crediting rate (generally 5% annually). This is an improvement over the traditional DB plan lump sums whose value fluctuates each year according to the changing interest rate environment. 

• ERISA Creditor Protection: CB plans offer an added layer of security through ERISA creditor protection. This federal law shields qualified plan accounts from creditors in most cases.

 

Cash Balance Plan Requirements

 

• Enrolled Actuary: An actuarial valuation must be certified by an Enrolled Actuary (EA) every year. Companies sponsoring CB plans, must hire an EA to prepare the actuarial certifications required.  

• Minimum Funding: Unlike 401(k) plans, minimum required contributions must be deposited each year into CB plans. Each year there is a minimum required contribution and a maximum deductible contribution and plan sponsors can fund any amount within this range. 

• Form 5500: Like 401(k) plans, CB plans are required to report specific information to the IRS and DOL on the Form 5500. This form must be filed annually. 

• Conservative Investments: Large investment gains or losses can cause issues for CB plans. CB plans should utilize a conservative investment strategy targeting 5% growth per year.

• Maximum Distributable Limit: Each participant has a maximum distributable limit that depends on their age, years of service, and wages. Plan sponsors should work with their actuary so that this limit is not exceeded. If plan assets grow beyond this limit it may result in the CB plan holding assets that can’t be distributed to participants.

​