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Cash Balance Plans

401(K) and Retirement Plans Small Business Resources Tax & Estate

Cash Balance plans, also known as "hybrid" plans, are a type of IRS-qualified retirement plan that combines the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401(k) plan. Cash Balance plans can be an ideal solution for business owners looking to reduce tax liabilities and accelerate retirement savings.

Notable attributes of a Cash Balance plan include:

  • Age-weighted contribution limits allow many high earners to double or triple their annual tax-deferred retirement savings.
  • Each participant has an individual account balance that can be taken as either a lump sum or an annuity at retirement age.
  • Accounts grow annually in two ways: an employer contribution and a guaranteed interest credit defined in the plan document.

Examples of pre-tax contributions:

  • A 45-year-old business owner could contribute $184,000 to his retirement plans.
  • A 55-year-old professional could contribute $271,500 to her retirement plans.

Plan Advantages

  • Reducing taxes - Business owners can save significantly on corporate and personal taxes.
  • Accelerating retirement savings - Many owners can double or even triple their pre-tax retirement savings.
  • Attracting and retaining top talent - Adding a Cash Balance plan can make a firm’s retirement package much more appealing to future partners and employees.
  • Easy to understand - Unlike traditionally complex defined benefit plans, Cash Balance plans offer clarity with individual participant accounts and statements.
  • Flexibility - Not everyone needs to participate in a Cash Balance plan. Different contribution amounts can be specified for different participants or groups.  Almost all business entity types and sizes can adopt a plan.
  • Portability - Participants can roll over their Cash Balance accounts into an IRA or another qualified plan.
  • Asset protection - Cash Balance plan assets are protected from creditors in the event of bankruptcy or lawsuits.

Ideal Candidates

Cash Balance plans are ideal for business owners and firm partners who want to defer more than $58,000 annually into retirement accounts. Good prospects include:

  • Partners or owners who need to catch up on delayed retirement savings. Age-weighted contribution limits allow older owners to squeeze 20 years of savings into 10.
  • Companies with consistent profitability. Cash Balance plans have required annual contributions so consistent cash flow is important.
  • Professional services firms including legal, medical, CPAs and financial services.
  • Successful family businesses and closely held businesses.

Cash Balance Plans provide you the ability to potentially deposit a significant portion of earnings into a retirement savings plan while also reducing your taxes. Contact Us Today to obtain a customized illustration for your business and assess the cost benefit analysis of this type of plan for your business. 

Source: Future Plan by Ascensus, a national retirement third party administrator