Cash Balance Plans

Overview

An Ideal Solution

Cash Balance plans, also known as "hybrid" plans, combine the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401(k) plan. Cash Balance plans can be an ideal solution for business owners looking to reduce tax liabilities and accelerate retirement savings.

Notable attributes of a Cash Balance plan include:
  • Age-weighted contribution limits allow many high earners to double or triple their annual tax-deferred retirement savings.
  • Each participant has an individual account balance that can be taken as either a lump sum or an annuity at retirement age.
  • Accounts grow annually in two ways: an employer contribution and a guaranteed interest credit defined in the plan document.
Examples of pre-tax contributions:
  • A 45-year-old business owner could contribute $183,000 to his retirement plans.
  • A 55-year-old professional could contribute $270,500 to her retirement plans.

Why Choose FuturePlan for Cash Balance?

Cash Balance plans are sophisticated, complex retirement plans that require customized design and specialized actuarial expertise. With significant tax deductions and IRS compliance issues at stake, plan sponsors need an experienced TPA with a record of long-term success. FuturePlan is a nationally recognized center of excellence for Cash Balance plans, formed by leading experts and led by Dan Kravitz.

Length of experience

FuturePlan experts have been designing and implementing Cash Balance plans since 1989, and our actuaries have decades of Cash Balance experience.

Breadth of experience

We serve more than 4,000 Cash Balance clients across all industry sectors, ranging in size from small owner-only plans to over 1,500 plan participants.

Industry knowledge

Our Cash Balance team has expertise in designing plans for law firms, medical groups and other professional services firms, including many with complex partnership structures. We also have insights on managing Cash Balance plans through mergers and acquisitions.

National thought leadership

The Kravitz team is recognized as the nation’s leader in Cash Balance plan design, offering the only available certification program, Cash Balance Coach.® We also published a well-received book on the topic and offer frequent webcasts and regulatory updates.

Guidance on investment strategy

We work with financial advisors to structure the right investment strategy. We offer both Actual Rate of Return (ARR) and traditional safe harbor Interest Crediting Rate (ICR) options.

Ideal Candidates

Cash Balance plans are ideal for business owners and firm partners who want to defer more than $57,000 annually into retirement accounts. Good prospects include:

  • Partners or owners who need to catch up on delayed retirement savings. Age-weighted contribution limits allow older owners to squeeze 20 years of savings into 10.
  • Companies with consistent profitability. Cash Balance plans have required annual contributions so consistent cash flow is important.
  • Professional services firms including legal, medical, CPAs and financial services.
  • Successful family businesses and closely held businesses.

Plan Advantages

Reducing taxes

Business owners can save significantly on corporate and personal taxes.

Accelerating retirement savings

Many owners can double or even triple their pre-tax retirement savings.

Attracting and retaining top talent

Adding a Cash Balance plan can make a firm’s retirement package much more appealing to future partners and employees.

Easy to understand

Unlike traditionally complex defined benefit plans, Cash Balance plans offer clarity with individual participant accounts and statements.

Flexibility

Not everyone needs to participate in a Cash Balance plan. Different contribution amounts can be specified for different participants or groups.  Almost all business entity types and sizes can adopt a plan.

Portability

Participants can roll over their Cash Balance accounts into an IRA or another qualified plan.

Asset protection

Cash Balance plan assets are protected from creditors in the event of bankruptcy or lawsuits.

After I understood all the qualities of a cash balance plan I knew it was the right solution for us to overcome the 401(k) limits, while providing major tax-deferred and tax-free accumulation savings, asset protection and stability.

Robert C. Master, MD
Palo Alto Foundation Medical Group

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Additional Information

A Cash Balance plan is a type of IRS-qualified retirement plan known as a “hybrid” plan. In a Cash Balance plan, each participant has an account that grows annually in two ways: first, an employer contribution and second, an interest credit, which is guaranteed rather than dependent on the plan’s investment performance.

The employer contribution is determined by a formula specified in the plan document. It can be a percentage of pay or a flat dollar amount. Below are the limits for 2020:

401(k) Profit Sharing & Cash Balance Plan Limits

The annual interest credit is guaranteed and is not dependent on the plan’s investment performance. The interest credit for smaller plans is usually a fixed rate of return of 4% and for some larger plans, an actual rate of return (ARR) may be appropriate. When participants terminate employment, they are eligible to receive the vested portion of their account balance.

Plan assets are pooled and invested by the trustee or investment manager. If the plan’s investment earnings exceed the guaranteed rate, the excess will be used to reduce future employer contributions. This will not affect the amount that is credited to the participants’ accounts. Conversely if the plan’s investment earnings are less than the guaranteed rate, then future employer contributions will be increased. This make-up is typically spread out over seven years. A wide range of investment vehicles can be used by the plan sponsor to achieve the interest crediting rate.

Yes, the employer can offer a combination of qualified retirement plans in order to produce a larger contribution. In fact, in most cases, a 401(k) Profit Sharing plan in conjunction with a Cash Balance plan is necessary to produce the desired owner and employee contributions.

Any vested account in a Cash Balance plan can be paid as a lump-sum distribution or annuity. A lump sum distribution can be rolled over to an IRA or another qualified retirement plan.

Yes, but with restrictions. Cash Balance plans can be amended periodically to permit different contribution levels. Usually, any reductions must be made before any employee works 1,000 hours during a plan year. In addition, a plan can also be frozen or terminated. Certain 15- to 45-day notices are required to participants when benefits are reduced.

No. Each participant can have a different amount contributed for them.

Tax deductions for contributions made on behalf of non-partner employees are taken on the partnership tax return. Tax deductions for contributions made on behalf of partners are taken on their personal or corporate tax returns. (However, to be sure that the amount deducted for tax purposes by a partner as shown on Schedule K-1 is the same as the amount contributed on behalf of the partner, the partnership’s agreement must permit this method of allocation. Most partnerships that adopt Cash Balance plans do not want the partners’ contributions allocated like most other firm expenses, in proportion to ownership.) Either the partnership agreement or internal policy should assure that each partner is allocated an appropriate share of the plan’s cost.

Yes, like any other qualified plan, a Cash Balance plan is subject to nondiscrimination testing. Employers can anticipate contributions in the range of 5% to 7.5% of pay for staff if the owners or partners receive the maximum Cash Balance contribution. The exact percentage required for employees depends on the number of employees included in the plan and the results of nondiscrimination testing.

Although it may appear that Cash Balance plans are more expensive to set up and maintain than 401(k) Profit Sharing plans, Cash Balance plans are typically more cost-effective. Because of the legal contribution limits imposed on 401(k) Profit Sharing plans combined with fees to cover the high cost of plan administration, 401(k) plans are a more costly way to deliver retirement savings. Cash Balance plans ultimately help employers and participants save more with significantly higher tax-deferred contribution limits and major tax deductions.

You can call 866-929-2525, or click here to contact a member of our team.