Business owners often want to know how they can contribute to their retirement beyond the 401(k) plan limits. One powerful solution is a cash balance pension plan.
- What is a Cash Balance Pension Plan?
Like traditional "defined benefit" pension plans, cash balance plans are professionally-managed. Participants are promised a retirement benefit reflected as an account balance—like a 401(k)—rather than an estimated monthly benefit like most pension plans.
- Why should I consider adding a Cash Balance Plan to my existing 401(k) plan?
For those relying on 401(k)s, a cash balance plan can slash tax bills and prop up a sagging nest egg. As of 2019, 401(k) employer/employee contributions for those over 49 are limited to $62,000. Cash balance contribution limits, however, increase with age. Participants 60 and older can sock away over $200,000 annually in pretax contributions.
- What are the advantages of a Cash Balance plan over a traditional Defined Benefit plan?
- Employees better understand their benefits
- Lump sum payments are not subject to IRC §417€ rates
- Direct tracking of contributions made to benefits that are ultimately distributed instead of having to estimate what the monthly benefit in the pension plan is worth
- Contributions are based on compensation, not age
- Why is it smart to keep our 401(k) plan, then?
Cash Balance plans are typically offered in combination with 401(k) profit sharing plans, resulting in one type of “combo plan.” When offered in tandem, these combo plans are evaluated together for compliance purposes and, given the right demographics, the owner and other targeted employees are able to receive much larger contributions with minimal increases to the profit-sharing contributions already being paid to staff.
No. In order to pass non-discrimination and (likely!) top-heavy minimum contribution requirements in a Cash Balance combo plan, the employer is required to make minimum profit-sharing contributions to the non-highly compensated and non-key employees each year. Besides providing a mechanism for employee deferrals, maintaining the 401(k)/CB combo plan also provides a cheaper way to provide top-heavy minimum contributions.
Of course, every plan sponsor should confirm details with their Plan Administrator and/or third-party administrator.
At BRI, we've got extensive experience with cash balance plans. Besides our annual review and tax filing work, we send you reminders to fund the plan and the PBGC on time and mail your required notices. We'll take care of the details so that you can do what you do best—run your business. Give us a call at 916.922.3200.
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