Cash Balance Plan Benefits for clients - Pinnacle Plan Design, LLC

Cash Balance Plan Information and Benefits Many owners desire larger tax deductions and accelerated retirement savings. Implementing a cash balance plan may be the best solution for such owners. Recent legislation encourages more and more professionals and successful business owners to adopt this type of plan. In a cash balance plan, a “theoretical” account balance (or “TAB”) is maintained on behalf of each participant. Thus, each participant in the cash balance plan has a TAB that resembles those in a 401(k) or profit sharing plan (defined contribution “DC” plans). On an annual basis the TAB is credited with a “compensation credit” and an “interest credit.” The compensation credit can be a flat dollar amount or a percentage of pay and

can vary by employee. The interest credit is determined by the plan document, and will typically be a fixed 5% rate or, alternatively, could be based on a conservative index, such as the rate on 30-year U.S. Treasury Securities. Because the cash balance plan is communicated in terms of an “account balance”, the benefits provided are more easily understood, and appreciated by employees. Cash balance plans take the mystery out of the employee benefit plan. Finally, cash balance plans are more predictable than traditional defined benefit plans; a participant’s account balance can be projected based on plan provisions to a future date with relative ease, no more special calculations or vague explanations. Examples of companies that benefited from implementing a cash balance plan: Bell, Inc., a small professional firm had a 401(k) profit sharing plan. Tim, the owner, was able to maximize his benefit at $49,000 with a cost for his six employees of $14,500. Celebrating th his 50 birthday in 2010, Tim is looking forward to retirement but understands that he will need to put away more than $49,000 per year to have the retirement of his dreams. We implemented a cash balance plan in 2010. The design enables Tim to contribute $154,500 toward his own retirement with a cost for his employees of $26,500. So, while his employee costs almost doubled, Tim’s contributions more than tripled. Dr. Tony has just brought a new, younger partner, Dr. Greg, on board. The discussions regarding the addition of a Cash Balance plan were difficult at first because Dr. Greg is not ready to seriously save for retirement. (He is worried about paying back medical school loans.) We designed the plan so that Dr. Tony gets $180,000 in the cash balance plan while Dr. Greg’s contribution is only $60,000 (a number in his comfort range). Their DC contributions are maximized and the cost for their 14 employees is 10.5% of compensation. Eighty-eight percent (88%) of the contributions to the plan are for the benefit of Dr. Tony and Dr. Greg. Cash balance plans are not just for small companies. One medical association has 74 physicians and over 400 employees. The plan design calls for various levels of cash balance contributions to the doctors and a de minimis contribution for the employees. Combined contributions to the defined contribution plan and the cash balance plan are over $9 million with 80% “allocated” to the...

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