The Cash Balance pension plan has grown in popularity since new rules were published in 2005.
It’s a Defined Benefit Pension Plan (DB plan) with Defined Contribution Plan (DC plan) characteristics. A few of the advantages to these plans include:
WHICH CHARACTERISTICS ARE LIKE A DB PLAN?
WHICH CHARACTERISTICS ARE LIKE A DC PLAN?
HOW DO CONTRIBUTIONS TO THE PLAN WORK?
During the plan design phase, the formula required to fund the retirement benefit is determined. Then each year a two-part contribution is made to the plan for each participant:
The plan sponsor actually funds the actuarial equivalent of the benefit as determined by the actuary.
Request to talk to one of our Pension Consultants to see if a Cash Balance Pension Plan is right for your company.
HOW CAN A CASH BALANCE PLAN BE USED TO SUPPORT SUCCESSION PLANNING?
Cash Balance plans work beautifully to help business owners accelerate their retirement funding while they are still working. This is a huge advantage to leave room for the next generation to take the reins of the company without the significant cash outlay that the retiring owner may otherwise require without the plan.
WHAT IF NOT ALL OWNERS WANT TO COMMIT TO A CASH BALANCE PLAN?
Many companies have multiple owners. Under a Cash Balance plan, each owner can dial in the contribution he or she wants to have designed into the plan. From a total compensation perspective each owner is the same after the plan as before – it’s just a matter of how that compensation is split between take home pay and retirement contributions. There will be some required contributions to the staff that may end up being shared among all owners. A customized illustration can shed light on how this might look for a particular company.
IS A CASH BALANCE PLAN MORE EXPENSIVE FOR OLDER EMPLOYEES?
No. Cash Balance plans are not age-discriminatory as long as the Pay Credits and Interest Credits are the same for all workers. Contributions are based on a career average benefit patters, so it avoids the heavy weighting of benefits in the final years of work.
CAN THE PLAN SPONSOR BOTH A CASH BALANCE PLAN AND A 401(k) PLAN?
Yes. A Safe Harbor 401(k) profit sharing plan that is paired with a Cash Balance plan provides for the most flexible and powerful plan design in most cases. The top-heavy minimum contribution requirement is typically provided in the Profit Sharing plan.
CAN A DEFINED BENEFIT PLAN BE CONVERTED TO A CASH BALANCE PENSION PLAN?
Yes. The Accrued Benefit under the plan is determined as of the date of the conversion, and compared to what the Accrued Benefit would have been under the cash balance formula.
WHAT MUST A CLIENT BE READY FOR IF THEY ADOPT A CASH BALANCE PLAN?
HOW CAN I GET A PLAN STARTED?
The plan document must be designed, drafted, and signed no later than the last day of the plan year. Request to have a pension consultant from Benefit Resources contact you about taking the first step toward looking at your options. We will return to you a customized illustration with a full services and cost proposal.
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