Cash Balance Plan Connection: Ideal Candidates

Cash balance plans are hot right now, with popularity increasing exponentially over the past few years. But this plan type isn’t for everyone. Wondering what types of businesses are the best fit? You’ve come to the right place. It’s time for…Cash balance connection! (announcer voice font 😉).

On one side of the curtain, we have a lonely cash balance plan looking for the right suitor to enjoy the fruits of what they have to offer. On the other side, we have three potential business matches looking for retirement plan love.

  1. MD Me, Inc. – Behind door number one is a profitable, single-owner in his mid-fifties. He has a medical practice with high taxable income every year, and a youthful staff.
  2. Attorneys in Charge, LLP – Door number two conceals a law firm with multiple partners, low capital expenditures, and consistent cash flow.
  3. Vanity You, LLC – Door number three masks a residential bathroom redesign contractor run by a mother who hopes to pass her business on to her daughter one day.

While all three seem to be great candidates for our cash balance plan, the details of each suitor will reveal which business truly has met their retirement and tax saving match.

Cash balance plan contender 1: Big spender

MD Me, Inc. has all the right stuff on the surface, but the word “cash” in cash balance plan is there for a reason. MD Me’s owner has toys, ClubMed, and several homes in exotic locales resulting in outflow spending that exceeds his income. Unless the spending comes under control, we are afraid MD ME, Inc. will be unable to meet the annual funding requirements. Sorry, MD Me, maybe in a couple of years.

Cash balance plan contender 2: Who’s in charge?

Attorneys in Charge, LLP also looks like a shoo-in to win. The partners’ range in age and desire to save for retirement are there, but they cannot reach a consensus on how the plan should benefit the staff and how the cost-to-benefit ratio will divide among the partners.

Multiple partners might present this challenge, but the cash balance plan is flexible enough to allow each partner their own classification for pay credits and a minimal amount to the staff. Furthermore, the companion 401(k) profit sharing plan will have the flexibility to provide more of the staff benefits and additional contributions for the partners. A good accountant or CFO can be a great advocate to help bring the partners to agreement.

Cash balance plan contender 3: The perfect fit

Vanity You, LLC has profitability and taxable income in need of the deductible contribution levels afforded by the cash balance plan. Additionally, the daughter, Dot, is able to fund her mother’s cash balance benefit from her own production.  The business has no debt and is flush with cash. While Dot defers her production, she gains dollar-for-dollar buying power while funding her mom’s retirement.  Meanwhile, the practice also gets the tax deduction because these are employer-funded contributions.

We have a winner! Vanity You, LLC is in the right place, in the right time, under the right conditions. While our first two suitors did not fit the bill, they can put their respective businesses in an optimal condition to make the cash balance plan a reality in the future.

Interested in more information on what makes an ideal candidate for a cash balance plan match? Fill out the form below and we’ll send you our one page overview!  

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