Many businesses are seeing the benefits of Cash Balance (CB) plans Offering Cash Balance as a sidecar to a 401(k) plan unlocks an additional retirement savings benefit for highly compensated employees. For high-income business owners or partners, a CB plan may create the opportunity to decrease taxes while increasing retirement savings. Additionally, if you are looking to attract and retain highly compensated employees, a Cash Balance plan is worth consideration.
What is a Cash Balance Plan?
A Cash Balance plan is a Defined Benefit (DB) retirement plan that incorporates features of a defined contribution plan. In the right circumstances, CB plans pair with 401(k) plans allowing business owners and partners within professional service firms to increase tax deferred retirement contributions, while simultaneously decreasing the company’s tax burden.
Unlike a traditional DB plan, a Cash Balance plan has the look and feel of a Defined contribution plan, where each participant within the plan has an “account” that grows each year with contribution credits and interest credits.
With a Cash Balance plan, an employer contributes an annual amount or “cash balance” to an employee’s account, which will receive a guaranteed rate of return. An employee’s account balance is portable and can be taken with them if they leave the company.
What Kind of Firms Are Adopting Cash Balance Plans?
Small to mid-size businesses continue to drive the growth of Cash Balance, with most businesses having at least one of these features:
• Firm with consistent profits – ongoing annual employer contributions are required
• Professional services firm
• Firm with few employees (25 or less)
• Willing to contribute at least 5% of compensation to employees
Benefits of a Cash Balance Plan
Cash Balance plans offer a tax-advantaged wealth growth strategy. There are numerous advantages such as:
• Income deferral opportunities greater than DC limits
• Flexibility around who is covered, as well as what the contribution level is
• Tax-deductible contributions
• Assets are safeguarded from creditors
• Total sum payouts available for rollover or Roth Conversion
• Clarity around the cost for each participant’s benefit
• Flexibility in benefit design
• Rapid growth of retirement savings
How a Cash Balance Works With a 401(k) Plan
A Cash Balance plan supplements a 401(k) plan and enables contributions in excess of those allowed within the 401(k) alone. This combination enables owners and partners to put away larger contributions and receive greater tax deductions.
CB plans offer more flexibility and allow different contributions to be allocated to each participant based on their age and current salary. CB plans help lower the retirement savings gap by providing a higher cash balance contribution to older and higher-income workers while minimizing the overall cost to the owner or partner. Here is a sample example of a CB plan design:
With a CB plan, high-earning individuals can reduce their modified adjusted gross income, reduce their marginal tax rate to a lower level and defer taxes until retirement.
Is a Cash Balance Plan Right for My Business?
Choosing the right retirement plan is imperative, especially for highly compensated individuals. A Cash Balance plan and a 401(k) Plan complement one another and allow businesses to attract and retain talented employees. Cash Balance plans are flexible and work well with a 401(k) plan. If you want to help your employees maximize their retirement savings and receive tax relief, a Cash Balance plan may be a valuable addition to your business’s retirement plan offering.
To learn if a Cash Balance plan is right for you or your clients, reach out to our team for more information.