Cash Balance Plan Design - July | Business Services

Maximizing Tax Deductions and Retirement Plan Contributions with a Cash Balance Plan Blake Willis, C.P.A. Partner and Chief Consulting Officer July Business Services Our Path Today • Why Cash Balance? • How Does it Work? – Examples • Best Candidates • How to Get Started 2 WHY CASH BALANCE 3 Cash Balance Plan Advantages This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.

5 Cash Balance Plan Advantages Increases • Benefit statements are participants’ easier to understand. understanding of their • Annual increases in benefit benefit amount are clear. 6 Cash Balance Plan Advantages Flexibility in Plan Design • Set equal contribution credits for partners / owners • Exclude partners • Vary contribution levels by group • Ownership • Practice area 7 How does it work? 8 What is a Cash Balance Plan? • Hybrid Plan : – Technically a defined benefit plan. • Benefit is defined. • No investment risk to the participant. • Annual Contributions are required. • Assets are pooled. – Provides a lump-sum based benefit formula. • Looks like a profit sharing plan. 9 Cash Balance Vocabulary • Each participant has a hypothetical account . • That account grows each year with a – Contribution credit – Interest credit • Both the contribution credit and interest credit are specified by the plan document. 10 Cash Balance Plan Example Participant Data: Current Year Pay $150,000 Contribution Credit in Document 20% of pay Interest Credit Rate in Document 5% Hypothetical Account Balance at Beginning of Year $35,000 Contribution Credit $30,000 Interest Credit $1,750 Hypothetical Account Balance at End of Year $66,750 11 Plan Type Comparison Characteristic Traditional DB Cash Balance 401K / PS Contribution Levels? Not limited Not limited Limited to $55,500 Who Bears Investment Risk? Plan Sponsor Plan Sponsor Employee Direction of Investments? Pooled Pooled Individual / Pooled Participant Accounts? No Hypothetical Yes Are Contributions Yes Yes No, can be Required? discretionary PBGC Coverage Required? Sometimes Sometimes No Retirement Benefit Formula? Annuity Lump Sum N/A 12 How should Assets be Invested? If Actual Investment Return is Higher than Interest Credit Rate (ICR) ICR 13 How should Assets be Invested? If Actual Investment Return is Higher than Interest Credit Rate (ICR) ICR Amount of Required Contribution Decreases 14 How should Assets be Invested? If Actual Investment Return is Lower than Interest Credit Rate (ICR) ICR Amount of Required Contribution Increases 15 EXAMPLES 16 Cash Balance Plan Example 1 One Owner Plans at Different Ages EE...

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