Cash Balance Plan Features
1. Niche Retirement Plan – Cash Balance Plans are a great
retirement plan fit and solution for physician groups, dental
groups, and other professional practices.They also work
well for other small business owners or self employed individuals.
2. Tax Deductible Contributions – A Cash Balance Plan is a
tax qualified retirementplan like 401(k) Plans. That means that the
contributions made to a Cash Balance Plans are tax deductible
and the investment earnings are tax deferred. Cash Balance Plan
assets are not subject to income tax until withdrawn from the
Cash Balance Plan or a rollover IRA.
3. Higher Contribution Limits – A Cash Balance Plan provides
for much higher tax deductible contributions than a 401(k) Profit
Sharing Plan alone can provide. The maximum contribution
amount is dependent upon an individuals age and generally
increases the older the individual, but at all ages the total
maximum contribution available is always higher with a Cash
Balance Plan than with a 401(k) Plan alone.
4. Creditor Protection – The Plan assets in a Cash Balance Plan
are ERISA creditor protected.
5. Flexible Design – A Cash Balance Plan can easily provide for
different levels of benefit and contributions for owners, physicians,
partners, and other key individuals. If a plan sponsor wants to
contribute a higher amount for one partner than another, that is
easy to accommodate in a Cash Balance Plan.
6. Supplement to 401(k) Plan – A Cash Balance Plan can be
maintained along withand as a companion to a 401(k) Profit
7. Benefit defined in Plan Document
a. Plan document provides for annual allocation & interest credit
b. Interest crediting rate is usually a fixed rate between 3%
and 5%. Some Cash Balance Plans now utilize a return
based or market based index. However, a low fixed
interesting crediting rate is much preferred due to concerns
with reducing the maximum lump sum benefit limit and
employee contribution cost increases based upon the use
of market based interest crediting rates.
c. Total value of plan assets are usually different than total
value of Cash Balance benefits
8. A Smarter Defined Benefit Plan – Cash Balance Plans are a type
of a Defined Benefit Pension Plan, but are an improved version
of Defined Benefit Plans and are preferable to traditional Defined
Benefit Pension Plans because:
a. Communication – The benefits are communicated as an
account balance that equates to what a participant could
receive in a lump sum if eligible for distribution. This is much
easier for all to understand than traditional Defined Benefit
b. Age Neutral for Staff – It is possible and common for a
Cash Balance Plan to provide for the same contribution rate
amongst staff. This was not possible with older traditional
Defined Benefit Pension Plans and often resulted in
unfavorable contribution cost amounts for certain employees.
c. Increased Flexibility – Cash Balance Plans are inherently
more flexible than traditional Defined Benefit Plans when it
comes to allocation and contribution amounts and ranges.
d. Consistent Benefit Growth – The benefits provided by
Cash Balance Plans grow at a plan defined interest rates
and are not subject to volatile changes in the value of the
benefits based upon changes in interest rate environments
like traditional Defined Benefit Plans.
9. ...But still a Defined Benefit Pension Plan
a. Subject to Annual Actuarial Valuation and Certification
by Enrolled Actuary.
b. Subject to minimum funding requirements. This does not
mean that contributions are necessarily required each year,
but Cash Balance Plans do not have the absolute
contribution flexibility inherent in Profit Sharing Plans.
c. Range of available contributions each year from minimum
funding to maximum deductible.
10. Pooled (Trustee Directed) Investment Account – Since a
Cash Balance Plan is atype of a Defined Benefit Pension Plan
and since the benefit amount provided to anon owner participant
is defined in the plan document and is not dependent upon the
plan asset return, it only makes sense for the Cash Balance Plan
to utilize trustee directed instead of individually directed
11. Optionally can provide for additional insured death benefits:
a. In addition to normal retirement benefit
b. Increased deductible contributions
c. Death benefit funded by deductible contributions
d. Can ultimately provide for tax free retirement income
or estate tax free insurance proceeds
12. Contribution Flexibility provided by:
a. An annual range of available contributions from minimum
required tomaximum deductible
b. Can amend plan up until 2.5 months after year end to
increase benefits and funding range
c. Can freeze plan or amend to lower allocation before 1000
hour point in year (i.e. can lower contribution requirement
on a prospective basis only).
d. Note, a plan sponsor is never required to fully fund a
Cash Balance Plan. Upon Plan Termination, the non owner
participants must receive the full value oftheir benefits.
However an owner of the plan sponsor can receive a lower
distribution amount based upon remaining plan asset
amounts in lieu of full funding their benefit amount.