Continuing with our Cash Balance Plan FAQ series, we will address how Cash Balance plans can be amended, how participation works, typical plan expenses, and PBGC and document deadlines.
- Can Cash Balance contributions be changed?
The plan can only be amended prospectively and infrequently. Once someone has worked 1,000 hours, they have earned a credit for that year and a contribution must be made.
- Do I have to treat everyone equally in my Cash Balance plan?
No. The plan is required to provide minimum benefits to the lesser of 40% or 50 employees. Therefore, given the right demographics, the plan can either exclude or provide less-than-minimum benefits to certain employees as long as the rules regarding minimum participation are satisfied.
- What is the vesting schedule in a Cash Balance Plan?
Accounts must be fully vested after three years of service. There is no graded vesting schedule. Service can be started from the inception of the plan.
- Can participants who leave during the year be excluded from receiving any contribution?
No, contributions must be made to terminated participants but only in the 401(k) plan as a profit-sharing contribution. The Cash Balance plan, however, may require 1,000 hours of service to receive an allocation for that year.
- Why are plan expenses to a cash balance plan higher than for a 401(k) plan?
Expenses for these plans can be considerably higher than for a 401(k) plan because the plan must be certified for funding status by an actuary, which means they’re also performing the applicable testing. While not cheap, the potential for tax savings from these types of plans has made them a popular choice. BRI recognizes our reduced role in compliance testing for these plans, so many of our clients who have added a cash balance plan to their 401(k) see the cost of that plan go down.
- Can the cash balance plan pay expenses from plan assets?
Generally, no, but cash balance plans may pay expenses from plan assets as long as participants’ benefits will not be reduced. That’s because the benefits are stipulated under the terms of the plan and paying expenses from the plan would only reduce the assets available to pay benefits, which could increase the employer’s funding obligation. In cases where investments have outperformed actuarial assumptions, paying expenses from the plan may be desirable to reduce associated penalties.
- How long should I be expected to maintain the cash balance plan?
The IRS has a permanency requirement. Although there is not an objective standard, five years appears to be a sufficient time to satisfy it. However, in the event of a significant business event (e.g., sale of the business, severe financial downturn), the plan may likely be terminated without regard for this requirement.
- What is the PBGC?
Most employers who want to offer a Cash Balance Plan are required to insure the funds by the Pension Benefit Guaranty Corporation (PBGC). This adds to the cost that an employer pays if they choose to offer this type of retirement option. PBGC premiums run about $80 per person in 2019 and are due 9 ½ months after the start of each plan year (10/15 for calendar plans). Professional services companies such as architects, engineers, attorneys, and doctors with less than 25 participants are exempt from PBGC as are owner- or partner-only plans.
- When is the deadline to set up a Cash Balance Plan?
The plan document must be designed, drafted, and signed no later than the last day of the plan year although we ask that you do not wait until the last minute to set up the plan! During the month of December there are many requests to set up new plans and we request at least 30 days before the end of the year to allow us to work with our actuaries to design your plan to its maximum potential. If you reach out to us in December, we’ll do everything we can to get you a document in time but be prepared for short deadlines, quick communication, and priority processing fees!
We hope this blog post provides you a solid framework you can follow whether you’re already a participant or just starting the evaluation process for your firm.
At Benefit Resources Inc, we love what we do and it shows. We build trusted relationships with our clients by creating added value and ensuring a smooth process.
