- A cash balance plan is a type of defined benefit plan (hybrid plan) that features characteristics of a defined contribution plan
Individual account balances
Portable accounts: Roll over into IRA upon leaving
ERISA rules apply - A cash balance plan allows for much larger pre-tax contributions than defined contribution plans
- A cash balance plan is especially attractive for closely-held firms or businesses
Plan designed to meet partners/shareholders objectives.
Best for individuals with high capacity for tax deferred saving. - Safe-harbored by the Pension Protection Act of 2006
Provided resolution to potential earlier legislative concerns.
Set “rules of the road”
- Mainly Law Firms, Medical and Dental practices, and family owned businesses. To a lesser extent, hedge funds, private equity firms, and accounting practices.
- Very practical when both older and younger owner/partners as a way of ‘funds’ the older generation’s retirement needs.
- Must have a relatively consistent cash flow and an appetite to save more than $60,000 annually per owner/partner in a tax-deferred environment
- Significantly more tax deferral than just 401(k)/profit-sharing Plans
- Creditor Protection
- Succession Planning
Forces the partners to save by the time they are of retirement age and they have the financial security to retire and pass down their clients to the younger generation.
Cash Balance Maximum Contribution Limits
| Age | 401(k) only | 401(k) with Profit Sharing | Cash Balance | TOTAL |
|---|---|---|---|---|
| 60–65 | $25,000 | $62,000 | $256,000 | $317,000 |
| 55–59 | $25,000 | $62,000 | $206,000 | $267,000 |
| 50–54 | $25,000 | $62,000 | $157,000 | $218,000 |
| 45–49 | $19,000 | $56,000 | $120,000 | $175,000 |
| 40–44 | $19,000 | $56,000 | $92,000 | $147,000 |
| 35–39 | $19,000 | $56,000 | $70,000 | $125,000 |
| 30–34 | $19,000 | $56,000 | $54,000 | $109,000 |
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Cash Balance Case Studies
Sample Cash Balance Plan
| Name | Age | Annual Salary | 401(k) | Profit Sharing | Cash Balance | Total Contribution | Tax Savings |
|---|---|---|---|---|---|---|---|
| Owners | |||||||
| Owner | 61 | $270,000 | $24,000 | $36,000 | $0 to $254,000 | $314,000 | $141,300 |
| Spouse | 56 | $65,000 | $24,000 | $9,750 | $0 to $57000 | $90,750 | $40,838 |
| Subtotals | $335,000 | $48,000 | $47,750 | $311,000 | $404,750 | $182,138 | |
| 4 Staff | |||||||
| Veronica Rowe | 41 | $51,000 | $3,825 | $700 | $4,525 | ||
| Patty Flores | 35 | $41,000 | $3,075 | $700 | $3,775 | ||
| Marc Fitzgerald | 28 | $34,000 | $2,550 | $700 | $3,250 | ||
| Sheldon Sparks | 44 | $21,000 | $1,575 | $700 | $2,275 | ||
| Subtotals | $147,000 | $11,025 | $2,800 | $13,825 | $6,221 | ||
| Grand Totals | $482,000 | $48,000 | $56,775 | $313,800 | $418,575 | $188,359 | |
| Percent of Contribution to Owners: 96.7% | |||||||