Thursday, September 12, 2013

Reduce Taxes, Increase Savings With A Cash Balance Plan

Reduce Taxes, Increase Savings With A Cash Balance PlanReduce Taxes, Increase Savings With A Cash Balance Plan Tony Brizzolara and Dan Kravitz An increasing number of highly- compensated individuals are finding that contributions made to their 401(k) and profit sharing accounts have reached the maximum allowable amounts. However, now those highly compensated individuals can increase their contributions through the increasingly popular Cash Balance Plan. As the fastest-growing retirement plan in the United States, 401(k) plans allow participants to contribute up to $20,500 for 2008, depending on the participant’s age. A profit-sharing plan allows employers to contribute another $30,500 on behalf of the participant. However, once the annual maximum contribution has been reached ($51,000 for those 50 years of age and over or $46,000 for those under 50 years

of age), then no further contributions can be made for that participant on a pre-tax basis. On the other hand, a Cash Balance Plan contribution can be as much as $200,000 per year, which varies by age. For individuals making in excess of $250,000 per year and who have a need for additional tax deductions, a Cash Balance Plan provides a welcome respite from the low retirement plan contribution levels available through a 401(k) profit sharing plan. Since 1985 when Bank of America implemented the first Cash Balance Plan, thousands of companies have followed suit. Citing predictability and ease of administration, firms oftentimes opt for Cash Balance Plans because of their portability, which is used to attract employees, especially the young mobile workforce in high- turnover industries. Initially, large corporations with more than 10,000 employees, such as AT&T, Bell Atlantic and IBM adopted Cash Balance Plans. However, a change in the tax law in 2001 allowed contributions to increase by as much as 60 percent, making Cash Balance Plans much more attractive to successful businesses and professional service firms. The Pension Protection Act of 2006 further cemented the future of Cash Balance Plans by allowing for substantial increases in contributions and tax savings. As of 2006, which are the latest statistics available, nearly 70 Cash Balance Plans had been implemented in Georgia, ranging from firms with two participants to Delta Airlines with over 90,000 participants. Nearly one third of Georgia Cash Balance Plans have been installed in medical and doctors’ groups. A Cash Balance Plan is a defined benefit plan that specifies the amount of contribution to be credited to each participant. The contribution can be either a flat dollar amount or a percentage of pay. The plan credits interest on those contributions at a guaranteed rate. Each participant has an individual account which resembles the accounts in a 401(k)/profit sharing plan. All participant accounts are maintained by the plan actuary who generates annual participant statements. The guaranteed rate of return is spelled out in the plan document and is not dependent on the plan’s investment performance. The rate of return changes each year and for many plans is equal to the yield on the 30-year Treasury bond, which in recent years has been around five percent. Once participants terminate employment, they are eligible to receive the vested portion of their account balance determined by the plan’s vesting schedule. Companies...

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