Cash Balance / Defined Benefit - Premier Plan Consultants

Cash Balance /
Defined Benefit

Designed for high-income earners to defer current year taxes and save for their retirement future.

What is a Cash Balance Plan?

A Cash Balance plan is an advanced retirement savings plan that allows high-income earners to significantly boost their retirement savings and defer current year taxes.

A Cash Balance plan is normally added to an existing 401(k) plan. This highly customizable plan arrangement provides simple retirement income projections and allows for substantially increased contribution limits that are determined by age, compensation and employee group.

How does this work?

Cash Balance plans are a pool of trustee directed funds. Account balances grow each year in two ways: employer contributions and annual interest credits. The plan document specifies the annual interest rate credit meaning investment performance does not impact the amount guaranteed for each participant. If investments overperform, it will not change what is owed to participants, but if investments underperform it will increase the amount to be funded over time; thus, conservative investment management is important.

Who is best suited for a Cash Balance plan?

High Income Earners Looking To Save More For Retirement

A Cash Balance plan allows a consistently high income earner to save for more retirement than a traditional 401(k) or IRA. Cash balance plans typically have higher contribution limits than 401(k)s and IRAs, which makes them attractive to high income earners who want to save more for retirement. For example, in 2022, the maximum annual contribution to a 401(k) is $20,500, but the maximum annual contribution to a cash balance plan is $290,000. This means that high income earners who are maxing out their 401(k) contributions may be able to save more for retirement in a cash balance plan.

Professionals That Are Ready to Save $100K or More per Year

Cash Balance plans can be particularly attractive for business owners or self-employed individuals who are looking to reduce their taxable income. Because contributions to a Cash Balance plan are tax-deductible, high earners, people who make over $100k, can use the plan to reduce their taxable income and potentially lower their tax bill. Cash Balance plans can be a powerful retirement savings tool for high earners who are able and willing to save a significant amount of money for retirement. However, it’s important to note that Cash Balance plans are typically only available through an employer or self-employment, so they may not be an option for everyone.

Individuals Who Are Looking For More Advanced Plan Design

Cash Balance plans require more expertise to design and administer effectively. Designing a Cash Balance plan can be complex, as it involves setting a target benefit level, determining contribution levels, selecting an appropriate interest crediting rate, and other factors. For individuals who are comfortable with advanced plan design and have experience with retirement plan administration, a cash balance plan may be a good option to consider.

Key Benefits

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.

Key Benefits

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.

Case Studies

All 2 /401k Profit Sharing 0 /Case Studies 0 /Cash Balance Owner Only 1 /Cash Balance WIth Employees 1 /Safe Harbor Match 0

Cash Balance Plans – Owner Only

Cash Balance Plans for Businesses with Employees

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