Retirement Planning
Retire
Confidently.
Expertise in creating retirement plans such as 401(k)s, SEP-IRAs, and cash balance pension plans to maximize deferrals and tax benefits.
Retirement Planning -
A Powerful Small Business Solution.
As a small business owner, we’re certain you’d like to consider combining the large benefit from a tax deduction provided by a Pension (defined benefit plan) with the portability and flexibility of a 401(k) (defined contribution plan). This is called a Cash Balance Plan.
Defined Contribution Plan
A Defined Contribution Plan is a retirement plan where the retirement contributions are “defined” or specifically set. An example is a SEP-IRA or a 401(k). The contributions to such plans are set and they have maximum limits.
Defined Benefit Plan
A Defined Benefit Plan is a retirement plan where the retirement benefit is defined in terms of an account balance. Unlike defined contribution plans, since the benefit is pre-determined, the contributions are undefined. This is because the contributions are determined based upon the salary, age, life expectancy and retirement year in order to fund the retirement account balance for the employee.
Cash Balance Plans
A cash balance plan is a defined benefit plan combined with a defined contribution plan. As such, it allows employers to fund larger contributions for their owners and employees compared to a 401(k)
Rather than having a benefit that is defined as a series of payments as in a traditional defined benefit plan, the benefit in a cash balance plan is defined in terms of a stated account balance. This hypothetical “account balance” grows in two ways: first, by the required annual employer contribution and second, a guaranteed rate of return on the contribution.
The annual contribution is calculated based upon the plan formula and actuarial assumptions. Unlike a traditional defined benefit plan formula, the cash balance plan formula considers salary only. As a result this can be designed to equalize the contribution for owners or highly compensated employees with the same compensation but different ages. For older non-highly compensated employees, the contributions may be minimized.
Sample Cash Balance/401(k) Plan Combination
The Examples shown are hypothetical in nature and used for illustrative purposes only.
Questions and Answers :
What is a Cash Balance Pension Plan?
How is the annual contribution computed?
Are employee contributions permitted?
How are benefits defined in a cash balance plan?
Benefits are defined as a hypothetical “account balance” for each participant. The accounts build steady value in two ways over an employee’s working life: the annual contribution credits and a guaranteed rate of return on the contribution.
Do cash balance plans have a vesting schedule?
Yes. One of the advantages of a qualified retirement plan is the vesting schedule. The vesting schedule requires employees to work for an employer for a specific period before becoming fully vested. A cash balance plan has a three year vested cliff (participants are fully vested after three years).
What are the advantages of a cash balance plan?
A cash balance plan is a powerful retirement vehicle.
It combines the contribution limits and large tax deductions of a defined benefit plan with account balances that look like a defined contribution plan. It is ideal for a business with a consistent cash flow to fund the plan and for owners who are looking for a larger contribution and tax deduction than a 401(k) or profit sharing plan. It provides a pension plan that is easier for employees to understand than a traditional defined benefit plan and has a portable benefit upon termination or retirement.
How do I evaluate a cash balance defined benefit plan for my business?
First, you need to meet with a representative from our firm. Our representative will collect census data and other pertinent information. A retirement plan proposal will be prepared based upon your objectives including funding goals.
The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. We cannot guarantee that the information herein is accurate, complete, or timely and we make no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Please consult an attorney or tax professional regarding your specific situation.
