Small business owners have welcome opportunity to reevaluate their retirement programs
As inflation rises to amounts not seen in decades, one silver lining is that IRS annual contribution limits for defined benefit and defined contribution plans are set to go up significantly in 2022. In general, retirement limits will increase by over 5% in 2022 when compared to the 2021 limits. As small business owners look at different alternatives to manage tax liability, increased retirement plan contribution limits provide small business owners with a great opportunity for tax deferrals. In particular, small business owners can add a tax-advantaged cash balance plan to their existing 401(k) profit sharing plans to realize significant tax savings while making meaningful contributions toward their employees' retirements.
Figure 1: 2022 IRS annual contribution limits
| Age | 401(k) deferrals | 401(k) plus profit sharing | Cash balance plan | Total |
|---|---|---|---|---|
| 30 | $20,500 | $61,000 | $64,000 | $125,000 |
| 35 | $20,500 | $61,000 | $82,000 | $143,000 |
| 40 | $20,500 | $61,000 | $105,000 | $166,000 |
| 45 | $20,500 | $61,000 | $135,000 | $196,000 |
| 50 | $27,000 | $67,500 | $173,000 | $240,500 |
| 55 | $27,000 | $67,500 | $222,000 | $289,500 |
| 60 | $27,000 | $67,500 | $285,000 | $352,500 |
| 65 | $27,000 | $67,500 | $295,000 | $362,500 |
| 70 | $27,000 | $67,500 | $379,000 | $446,500 |
For those with 401(k) profit sharing plans, a separate cash balance plan can be established and coupled with the existing plan to help small business owners substantially increase contributions to their retirement programs. As outlined in Figure 1, depending on the ages of the owners and the staff, these contributions can be as high as $300,000 or more. This allows small business owners to maximize their tax-deductible contributions and manage their tax liabilities—strategies that can be particularly attractive for family-owned businesses or professionals such as accountants, lawyers, and doctors.
Figure 1 illustrates the maximum 2022 amounts that will be allowed for 401(k) deferrals, profit sharing plan contributions, and cash balance plan contribution. Note, however, that contributions to a profit-sharing plan may be limited to 6% of compensation for certain employers that are not covered by the Pension Benefit Guaranty Corporation (PBGC). Likewise, cash balance plan maximums may be limited based on the ages of the owners and staff, the specific plan provisions set forth in the plan document, and IRS deduction limits.
Please contact Mike Peatrowsky or Joe Zienty to discuss how small business owners can benefit from these increased contribution limits.