Saturday, September 14, 2013

Cash Balance Plans 2011 - Retirement Strategies

Cash Balance Plans 2011 - Retirement Strategies, Inc. Pension Plan ...Cash Balance Plans 101 Cash balance plans have enjoyed a recent resurgence in popularity. However, these plans, which can provide tax-deductible benefits as much as five times greater than 401(k) profit sharing plans, have actually existed for more than 30 years. When the Pension Protection Act of 2006 (PPA) resolved much of the legal uncertainty of these plans, small and large companies alike showed a renewed interest. According to a recent research report, the number of cash balance plans in- creased by more than 23% from 2006 to 2007 and more than 75% of existing cash balance plans are sponsored by companies with fewer than 50 employees. What is a Cash Balance Plan? Before answering this question, some general

back- ground information helps put the discussion in context. A defined contribution (DC) plan, such as a 401(k) profit sharing plan, dictates the contributions that go into the plan each year. Contributions, which are usu- ally discretionary, include employee salary deferrals, employer matching contributions and employer profit sharing contributions. The maximum amount a participant can receive in a DC plan each year is $49,000 for those under age 50 and $54,500 for those age 50 or older. These contributions and the investment returns they generate determine a participant’s ultimate retirement benefit. A defined benefit (DB) plan promises a benefit using a formula that is usually based on compensation and years of service. For example, a DB plan might provide an annual benefit equal to 1% of average compensation for each year of service. If a participant has average compensation of $65,000 over 10 years with the company, the annual benefit is equal to $6,500 ($65,000 x 1% x 10 years of service) for the rest of the participant’s life. Rather than limiting contributions, the IRS limits the maximum annual benefit a DB plan can provide to a participant to $195,000 per year. The contribution is a function of how much is needed to fund the promised benefits. While there are a number of variables, the following table summarizes the tax-deductible contributions to fund maximum benefits for DB participants of different ages: Age 35 40 45 50 55 60 65 Contribution $29,000 $40,800 $59,400 $91,100 $153,900 $195,500 $245,600 The employer is said to bear the investment risk because the higher the return on investment, the lower the A non-technical review of qualified retirement plan legislative and administrative issues January 2011 Benefit Insights portion of the funding that must come from the company and viceversa. To the extent a DB plan is not fully funded, contributions are generally required each year. A cash balance plan is a type of plan that is sometimes referred to as a hybrid plan, because it includes both DB and DC characteristics. Cash balance plans generally express benefits in the form of contributions much like a DC plan while requiring regular funding of those promised benefits like a DB plan. Contribution Credits Unlike traditional DB plans that express benefits using a formula that can appear esoteric to the average employee, cash balance plans express benefits using specific contribution...

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