Continuing with part 2 of our Cash Balance Plan FAQ series, we will address Pay and Interest Credits, participant hypothetical accounts, investing and funding deadlines.
- What are these Pay and Interest Credits I’m seeing on my participant statement?
The Pay Credit is the contribution amount as specified in the plan document. The Interest Credit is usually a fixed rate of return that the plan guarantees.
- Can participants in a Cash Balance plan see their accounts online?
No. Unlike a 401(k) plan, Cash Balance plans do not offer fund investment choices. Each established account is set aside as a “hypothetical account” for each contributing employee. At the end of each year, the employee receives a statement of their contributions and return on investment.
- Who bears the Risk of Investment?
In a Cash Balance plan, unlike a 401(k) plan, the investment risk lies with the employer as all assets are trustee-directed in a single pooled account. Depending on benefits calculated and investment performance, a minimum required contribution is calculated each year. If the plan fails to meet the return prescribed by the plan document, this minimum contribution increases accordingly. Conversely, the consequence of too much investment return is a reduced funding limit which potentially leads to increased tax liability for the employer.
The following rates may be used for a Cash Balance plan:
- A fixed rate of 3–6%. We recommend a lower fixed rate for preferential allocations to older owners and also to limit the employer’s responsibility to make up for lackluster returns.
- A Treasury yield rate (i.e., a 30-year Treasury bond)
- The Trust’s actual rate of return. This is an appealing option because it passes risk to the participants. However, until the IRS issues further statutory guidance we recommend this method only be used with the assistance of legal counsel.
The Trust’s investment strategy should be coordinated with the plan’s crediting rate to avoid losses. The cash balance plan document will indicate an interest crediting rate for the plan which provides the targeted earnings for the plan assets each year.
- How much should I expect to give to my employees if I’m maxing out my Cash Balance plan?
Business owners should expect to offer the plan to no fewer than 40% of their employees and provide a combined benefit of 7.5% of pay to staff (a typical standalone 401(k) plan benefit is closer to 5% of pay). However, depending on the company demographic, a significant percentage of the overall contribution can be directed towards the owners. BRI charges a nominal fee to perform this feasibility study, which we apply against our setup costs for new clients.
- When does the Cash Balance Plan have to be funded?
The funding is due the date of your tax return, including extensions but NO LATER than 8 ½ months after the end of the plan year.
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