Cash balance plans are the fastest growing segment in the retirement plan space. How do you know if a cash balance plan is right for you or your company and if now is the best time for you to establish one?
There are two questions to consider:
- Are you a small business owner looking to accelerate your savings for retirement?
- Are you looking for larger tax deductions for you, your partners, or your business?
If you answered “yes” to either of these questions, then a cash balance plan may be the solution.
A cash balance plan combines the best of a defined benefit contribution, otherwise known as a pension plan, with some of the flexibility of a defined contribution plan, like a 401(k). For that reason, a cash balance plan is considered a hybrid retirement plan.
A cash balance plan allows you to make a far greater contribution than a 401(k) or profit-sharing plan alone. When you add a cash balance plan with a 401(k) or profit-sharing plan, you maximize the amount of contributions.
For example, review the chart below, which shows the maximum contribution based on age. You can see the dramatic difference in contributions the cash balance plan provides, as well as the estimated tax savings. Further, anyone with under 50 employees without a retirement plan may be eligible for the start-up tax credit (100%, up to $5,000) to cover eligible plan expenses for the first three years; plus an additional credit exclusively for defined contribution plans (of up to $1,000 per employee) that phases out over five years, enhancing the tax savings further. Be sure to talk to your tax advisor regarding your specific tax savings to see if you qualify.
2023 Maximum Contribution Limits
401(k), Profit Sharing and Cash Balance Plans
| Age | 401(k) Only | 401(k) with Profit Sharing | Cash Balance | Total | Tax Savings* |
|---|---|---|---|---|---|
| 70 | $30,000 | $73,500 | $398,000 | $471,500 | $212,100 |
| 65 | $30,000 | $73,500 | $321,000 | $394,500 | $177,500 |
| 60 | $30,000 | $73,500 | $309,000 | $382,500 | $172,100 |
| 55 | $30,000 | $73,500 | $241,000 | $314,500 | $141,500 |
| 50 | $30,000 | $73,500 | $188,000 | $261,500 | $117,600 |
*Tax savings assumes 45% tax. Taxes are deferred. Chart based on commonly accessible data.
Factors to keep in mind when evaluating a Cash Balance Plan
A cash balance plan does allow you to exclude highly compensated employees as well as certain job classifications. However, the plan is subject to IRS nondiscrimination testing and is usually paired with a 401(k) plan to make it easier to pass this testing. Cash balance plans require annual contributions, unlike 401(k) and profit-sharing plans, that may allow discretionary contributions. It can periodically be amended and can also be frozen or terminated under certain circumstances. Lastly, a cash balance plan, due to the actuarial component, is more costly to administer than a standard plan. All these factors, along with the tax savings, should be considered in deciding if a cash balance plan is the right solution for you.
To speak with our team of financial planners about these plans, please contact us:
This article does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation.
Investment advisory services offered through Sikich Financial, an SEC Registered Investment Advisor.
