Cash Balance plans offer tremendous tax advantages including:
- Significant deductions at the time of contribution
- Contributions directly reduce taxable income
- Year-after-year contributions grow tax deferred
- Accelerated retirement savings
- Attraction + retention of top talent
- Flexibility + portability
- Protection from creditors
Cash Balance Plan Considerations
While cash balance plans are tailored to meet the specific needs of each company, it’s important to note a few specific requirements.
If any of the following statements are true, then a cash balance plan may be a good fit:
- You have consistent, excess cash flow
- Owners, or key employees, want to save more than $50,000 into their retirement accounts
- You already contribute 3 – 4% of your employees’ salary into the company’s retirement plan and are prepared to fund approximately 8 – 10%
- You are comfortable with advanced plan design
- You have a good administrative partner for support
A few additional items you should be aware of prior to committing to a cash balance plan:
- Plan must be set up with the intention of being permanent (minimum 3 – 5 year commitment)
- Changes in plan demographics may impact contribution requirements
- Minimum funding may be required
What is a Defined Benefit Plan?
A Defined Benefit Plan is a type of retirement plan where an employer promises to pay a specific amount of income to the employee upon retirement. The amount of income is based on factors such as the employee’s years of service, salary history, and age.
How does it work?
It’s important to know that the benefits are usually based on a formula that takes into account the employee’s years of service and final average salary. The formula may also factor in the employee’s age at retirement and the form of payment they choose, such as a single life annuity or a joint and survivor annuity.
A Defined Benefit Plan offers many benefits to the employee:
- Guaranteed income stream for retirement
- The employer bears the investment risk, not the employee
- Potentially higher contribution limits than other retirement plans
- Employer contributions are tax-deductible
- Retirement income is based on a formula that considers years of service and the final average salary
- Predictable retirement income, regardless of investment performance
- No need for the employee to manage investments or make investment decisions
- Potentially includes other benefits such as disability and survivor benefits
- Protection against inflation with cost-of-living adjustments (COLAs)
However, it is important to note that there are some downsides to consider as well, including limited flexibility in terms of investment choices and benefit payouts, and the risk of the employer not being able to fulfill its promised obligations in the future.