Employers and owners continually look at different strategies to defer tax on income, provide benefits to key employees, and boost their retirement savings. As Bart Pushaw noted in a recent blog post, cash balance plans have the potential to provide for solid retirement security and shelter greater income from taxation to increase retirement wealth. The big question for employers remains how to know if adding a cash balance plan is right for them.
Advantages of a cash balance plan for employers:
They offer the potential for larger tax-deferred contributions than permitted under current defined contribution (DC) limits for owners or key employees.
Tiered benefit levels are attractive to partnerships and professional services.
Account balances are easy to understand for participants when compared to traditional defined benefit (DB) plans.
Cash balance plans are generally less volatile and less expensive than traditional DB plans.
They can provide greater funding flexibility than DC plans.
Disadvantages of a cash balance plan for employers:
They require actuarial services to determine funding levels.
Plan funding levels may restrict lump sum payments.
Typically, the employer bears the investment risk.
Cash balance plans require Pension Benefit Guaranty Corporation (PBGC) premiums.
Typically, plans are individually designed so plan documents are more expensive than prototype documents.
Candidates for a cash balance plan:
Employers that want contributions in excess of the limits allowed under DC plans for owners, partners, or key employees
Employers that have the resources to make the required contributions
Employers that generally are not affected by economic volatility
Employers with older key employees and younger staff
Employers who have a generous 401(k)/profit sharing plan for staff
If you are an employer who fits the candidate criteria above, and believe that the advantages of a cash balance plan may outweigh the disadvantages, then now might be the right time to investigate further.
Advantages of a cash balance plan for employers:
They offer the potential for larger tax-deferred contributions than permitted under current defined contribution (DC) limits for owners or key employees.
Tiered benefit levels are attractive to partnerships and professional services.
Account balances are easy to understand for participants when compared to traditional defined benefit (DB) plans.
Cash balance plans are generally less volatile and less expensive than traditional DB plans.
They can provide greater funding flexibility than DC plans.
Disadvantages of a cash balance plan for employers:
They require actuarial services to determine funding levels.
Plan funding levels may restrict lump sum payments.
Typically, the employer bears the investment risk.
Cash balance plans require Pension Benefit Guaranty Corporation (PBGC) premiums.
Typically, plans are individually designed so plan documents are more expensive than prototype documents.
Candidates for a cash balance plan:
Employers that want contributions in excess of the limits allowed under DC plans for owners, partners, or key employees
Employers that have the resources to make the required contributions
Employers that generally are not affected by economic volatility
Employers with older key employees and younger staff
Employers who have a generous 401(k)/profit sharing plan for staff
If you are an employer who fits the candidate criteria above, and believe that the advantages of a cash balance plan may outweigh the disadvantages, then now might be the right time to investigate further.