Cash Balance Plans: Back to the Basics

What is a cash balance plan and what are the benefits?

Cash balance plans help business owners fund and deduct very large employer contributions. These plans allow employers to contribute significantly more than they can with a typical 401(k) plan. They are also a great way to reduce the company tax burden. Cash balance plans allow employers to make up for lost time and are a good option for those who might need to catch up on retirement plan savings.

Often referred to as a “hybrid” plan, cash balance plans are a type of defined benefit plan that act like a defined contribution plan. This means cash balance plans can be paid out as a lifetime annuity or a lump sum. In these plans, employees do not make contributions. The employer makes an annual deductible business contribution on behalf of employees, as a percentage of pay or flat dollar amount with guaranteed interest. Cash balance plans are typically set up to heavily benefit the owners or other specified employees. They can also be established with companies that already have an existing 401(k) or profit sharing plan. When this is done, it is usually referred to as a “combo” plan.

Who are the best candidates for a cash balance plan?

Cash balance plans can be a good fit for companies with or without employees. They typically work best for companies with consistent profitability, when an owner’s reportable compensation is significantly higher than their employees. It’s also important that the company be willing to keep the plan long-term, least three to five years. Cash balance plans are not a good option if an employer only wants the plan for a few years.

Should you adopt a cash balance plan?

If business owners are feeling limited by their current plan’s IRS limits, have consistent profit patterns, and want to reduce their current employer tax liability, a cash balance plan addition might be a great fit. These factors make cash balance plans a popular retirement plan option. This is especially the case with small, high-earning businesses (doctors, attorneys, etc.). If you’re considering a cash balance plan, check out our short video overview for more information.

When should you consider adopting a cash balance plan?

The SECURE Act made it possible for business owners to retroactively adopt a new qualified plan, such as a profit sharing, defined benefit, or cash balance plan, after the close of the plan year.

Much like implementing a SEP retroactively, this means that employers now have until the due date of the business’s tax return, including extensions, to establish a cash balance plan. The tax filing deadline varies based on the employer’s business entity type and corporate year end.

For example, if an S-corp or C-Corp employer would like to establish a cash balance plan for the 2021 calendar year, they can establish a plan and contribute to a new cash balance plan by September 15th 2022 if their business tax return was extended. Of course, EGPS requires time to calculate the contribution options and draft the legal plan document, typically a few months before the deadline. This is a significant change that creates a lot of opportunities, and we cover this concept more extensively here.

What factors should you consider in a cash balance service provider/third-party administrator (TPA)?

  • Experience. Cash balance plans are complex and subject to numerous requirements from various governmental agencies, such as the IRS, DOL, and PBGC. Having a TPA with a deep level of cash balance knowledge and experience is crucial to ensuring the plan is designed and maintained according to the law. Business owners are held liable for plan compliance, and are subject to penalties for any plan errors. 
  • In-house actuaries. Cash balance plans (and all defined benefit plans) require the work of an Enrolled Actuary. If a TPA does not have experts with this designation on-staff, they must outsource the work and approval of plan numbers to a firm that does. This can create delay, room for error, and the potential for higher fees.
  • Service standards. We know it’s frustrating to wait on hold or call a 1-800 number when you have a question. Look for a service provider that supports clients with one primary point of contact, dedicated to the plan and available for questions directly via phone or email.  Make sure response time meets or exceeds your standard of care.

How can EGPS help?

EGPS has been designing and administering defined benefit plans since 1971. With 8 in-house Enrolled Actuaries, we have the expertise to create the best retirement plan solution for clients. EGPS also provides a dedicated retirement plan consultant for each client. This means they get one direct contact, focused on their plan, available and ready to answer questions.

Interested in potentially setting up a cash balance plan with EGPS? Fill out this short form and we’ll provide you with a proposal.

Interested in simply learning more about cash balance plans? Complete the form below and we’ll send you additional resources regarding these plans.

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Compliance Manager

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