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Cash Balance Plans
A Cash Balance Plan is a type of Defined Benefit Plan. By taking advantage of age and salary differences, a Cash Balance Plan tilts the contributions towards a desired employee or group of employees. Unlike a traditional Defined Benefit Plan however, a Cash Balance Plan provides a "hypothetical" account balance for the participants which accrues interest at a pre-defined government rate.
Advantages:
 | If the demographics are right, the plan may provide contributions to the key employees in an amount much greater than allowed in even Cross-Tested Plans. |
| Provides the ability to create multiple benefit levels. |
| When combined with a 401(k) or Profit Sharing Plan, employer contributions to those plans can be used to allow larger contributions to key employees in both plans. |
| Easier for employees to understand since their participant statements reflect a beginning balance, gains, and ending balance, much like a Defined Contribution Plan. |
Cash Balance Plans are Ideal For:
| Employers who are older than some of the staff employees. |
| Employers desiring larger contributions for certain classes of employees. |
| Employers with substantial resources. |
| Employers with stable income. |
Disadvantages:
| Requires an individually designed plan document. |
| Additional actuarial and administrative costs. |
| Required contributions. |
| May require PBGC premiums. |
Following is an example of a Cash Balance Plan combined with a Cross-Tested 401(k) Plan. The objective of this plan design is to provide the owners with a substantial contribution amount each year, while minimizing the required employer contribution to the staff.
| Age | Plan Wages | Deferrals | Profit Sharing Contrib. | Cash Balance Contrib. | Total Employer Contributions | Percent of Total Employer Contributions | Percent of Wages | |
| Owner 1 | 55 | 225,000 | 20,500 | 2,250 | 126,000 | 148,750 | 51.54% | 66.11% |
| Owner 2 | 48 | 225,000 | 15,500 | 25,650 | 90,000 | 131,150 | 45.44% | 58.29% |
|
Subtotal |
450,000 | 36,000 | 27,900 | 216,000 | 279,900 | 96.99% | ||
| Staff 1 | 22 | 40,000 | 2,800 | 2,100 | 800 | 2,900 | 1.00% | 7.25% |
| Staff 2 | 67 | 30,000 | 1,500 | 1,575 | 600 | 2,175 | 0.75% | 7.25% |
| Staff 3 | 39 | 20,000 | 600 | 1,050 | 400 | 1,450 | 0.50% | 7.25% |
| Staff 4 | 51 | 15,000 | 0 | 788 | 300 | 1,088 | 0.38% | 7.25% |
| Staff 5 | 33 | 15,000 | 0 | 788 | 300 | 1,088 | 0.38% | 7.25% |
|
Subtotal |
120,000 | 4,900 | 6,301 | 2,400 | 8,701 | 3.01% | ||
| 570,000 | 40,900 | 34,201 | 218,400 | 288,601 | 100.00% |
How Complicated are
Cash Balance Plans?
Cash
Balance Plans are the most complicated plans to administer. Without
the proper administrative services, a Cash Balance Plan can turn into a
nightmare for the plan sponsor. An integral part of the complexities of a Cash
Balance Plan is in the plan design. If the proper care is
taken during the plan design process, Cash Balance Plans are sure to meet
the objectives of the plan sponsor.
Your plan will run smoothly and efficiently if it receives the careful and consistent attention of experienced plan administrators, with advanced computer support systems, working closely with your office staff. Our services include all functions necessary for the smooth operation of your plan, including Plan Design, Documentation, Employee Communication, and Complete Administration.
We have the expertise to determine if this type of Plan is for you!
Contact Us Today for a Free Consultation