The Benefits of Cash Balance Pension Plans

Save $200K to $500K Annually with Tax-Deferred Savings

The Cash Balance Plus Plan allows solo and small business owners, professionals, and entrepreneurs to save significantly more money compared to traditional retirement savings plans. This defined-benefit plan offers higher contribution limits while minimizing costs for employees. As a result, the majority of plan contributions are allocated to selected participants, complying with IRS rules.

What is a Cash Balance Plus Plan?

A cash balance plan combines features of a defined benefit plan and a 401(k) plan. It was made possible by the Pension Protection Act of 2006, which expanded tax-deferred retirement planning options beyond traditional IRAs and 401(k) accounts. The flexibility of a Cash Balance Plus Plan allows for customized retirement savings that exceed the limits of traditional plans. These plans fall under ERISA rules, offering asset protection.

Unlike traditional retirement plans, a business owner using a Cash Balance Plus Plan can allocate a smaller portion of contributions to employees. The majority of the contribution can go to the owner(s) while remaining compliant with regulations. In contrast to the maximum contribution limit of $61,000 in traditional plans, Cash Balance Plus Plan owners can deduct from $200K to $500K or even up to $1 million annually.

Increase Your Retirement Savings

Cash balance plans allow owner-employees to defer taxes on income that exceeds the annual limits of traditional retirement plans. When participants retire, they can receive an annuity based on their account balance or a lump sum that can be rolled over into another retirement account.

Many older business owners choose cash balance plans to maximize their retirement savings. These plans offer generous contribution limits that increase with age. Individuals aged 60 and older can save over $300,000 each year in tax-deductible contributions.

Benefits of Tax-Deferred Retirement Saving

While traditional retirement plans offer tax deferral, contributions are limited by federal regulations. Cash balance plans, being defined benefit plans, are not subject to these limits. However, there is a cap on the annual payout at retirement. By combining a Cash Balance Plus Plan with a 401(k) plan, a profit-sharing plan, and a medical expense account, individuals can optimize tax deferral and retirement savings.

The annual contribution limit for a cash balance plan depends on factors such as age and salary. It can be increased by combining various techniques and accounts. These plans comply with nondiscrimination and minimum participation rules set by the IRS.

Protection Against Creditors

Cash balance plans are protected from individual and business creditors by ERISA and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, as confirmed by the U.S. Supreme Court.

Key Features of a Cash Balance Plus Design

Cost: Cash balance plans offer cost reductions in overall retirement plan expenses as benefits are based on current salary.

Flexibility: Plans are highly customizable and can be designed to allocate more benefits to older and key employees while complying with non-discrimination rules. Benefits can be distributed as an annuity or as a lump sum.

Simplicity: Employees can easily understand the value and mechanics of a cash balance plan.

Portability: Plan values can be transferred to other accounts upon retirement, termination of the plan, or end of employment.

Security: Plans are protected against creditors, and larger businesses with more than 25 employees are guaranteed by the PBGC.

Tax Deferral: Contributions to cash balance plans are fully tax-deductible, and benefits grow tax deferred.

Qualified Business Income Deduction: Contributions to a qualified retirement plan can help reduce taxable income and increase the Qualified Business Income Deduction.

How Does a Defined Benefit Cash Balance Plan Work?

A cash balance plan’s account balance grows through two components: a contribution credit and an annual interest credit. The contribution credit is calculated annually based on plan design, actuarial assumptions, and IRS regulations. The annual interest credit can be tied to an outside index or a fixed guaranteed rate.

The plan’s investment portfolio does not need to match the annual interest credit rate precisely. The plan can become underfunded or overfunded based on the portfolio’s performance. Underfunding can result in increased annual contributions, while overfunding may lead to excise tax. It is advisable to manage the plan portfolio to avoid these extremes.

A cash balance plan typically has a conservative investment approach, given the fixed annual interest credit rate. Participants receive annual account statements that show the lump sum value of their benefits under the plan. The plan’s assets are usually managed with the help of an investment advisor.

If an individual leaves employment or a business terminates the plan, the account balance can be rolled over into another tax-advantaged account. Early withdrawals from the plan before retirement age (59½+) are subject to penalties and income taxation.

Maximum Contribution Limits

The lifetime maximum contribution depends on age and salary, with older individuals having higher limits. The maximum annual pension benefit from a cash balance plan is currently $245K, and the overall lifetime maximum is around $3.1M.

Duration of the Plan

For solo businesses, plans typically exist for a shorter period, often around 10 years. After reaching the lifetime maximum amount, contributions to the plan cease. In plans with multiple participants, termination of one account does not significantly impact the plan’s operations.

Who Should Consider a Cash Balance Plan?

Any business owner or key employee who wants to save $150,000 or more annually in a tax-deferred manner could benefit from a cash balance plan. It is particularly suitable for older individuals who need to catch up on retirement savings and want to minimize employee plan costs. Professionals and small business owners often find these plans helpful for consolidating their retirement savings in a limited period.

Administration and Costs

The cost of setting up and managing a Cash Balance Plus Plan is comparable to that of a 401(k) plan when considering all service providers. The plan sponsor is responsible for setting up and administering the plan, as well as managing plan assets with the help of service providers such as actuaries and investment advisors. Costs can vary based on business size and typically include setup fees, administration fees, and insurance premiums for larger businesses.

For more information about Cash Balance Plus plans or other services provided by Thomas Swenson, please contact them directly via the provided information.

Disclaimer: This information is intended for informational and educational purposes only and should not be considered personalized legal or financial advice. Contact the relevant professionals for personalized advice and services.

IRS Circular 230 Disclosure: The information provided herein is not intended to promote, market, or recommend any transaction or matter for the purpose of avoiding penalties under the Internal Revenue Code.