Cash Balance Plan Overview

Cash Balance Plan Overview A Cash Balance Plan is a type of qualified retirement plan that is a “hybrid” between a traditional Defined Contribution Plan and a traditional Defined Benefit Plan. Like traditional retirement plans, Cash Balance Plans qualify for tax deferral and creditor protection under the federal pension law known as ERISA. Cash Balance Plans are particularly effective for small business owners who are looking for larger tax deductions and/or accelerated retirement savings. Employers can combine Cash Balance Plans with 401(k) Profit Sharing Plans to maximize tax-deductible contributions. In a Cash Balance Plan, each participant has a theoretical account that resembles those in a 401(k) or profit sharing plan, but is not actually maintained in individual accounts. The plan

maintains one commingled trust account for all plan participants and hypothetical individual accounts are maintained by the plan’s actuary/third party administrator, who generates annual participant statements. Each participant’s account grows annually in two ways: i) A benefit credit. The benefit credit is a percentage of pay or flat dollar amount that is specified in the plan document. The credit is often class-based (e.g., higher dollar or percentage amount to owners/partners or other targeted groups; lower dollar or percentage amounts to staff). ii) An interest credit. The interest credit is a guaranteed rate of return specified in the plan document, and is typically tied to federal long-term rates or set at a fixed 5%. The interest credit is not dependent on the plan’s actual investment performance, but the plan’s investment portfolio should be structured to attempt to perform in-line with the anticipated crediting rate. When participants terminate employment, they are eligible to receive the vested portion of their theoretical account balance. Cash Balance Plan Benefits What types of companies or business owners benefit from a Cash Balance Plan?  Business owners or partners who want to contribute & deduct more than $51,000 per year in retirement savings. Many highly-compensated individuals are finding that contributions made to their 401(k) and profit sharing accounts have reached the maximum allowable amounts (currently $51,000, or $56,500 if age 50 or older). Maximum annual contributions to a Cash Balance Plan are significantly greater than what is allowable through a Defined Contribution Plan. With a Cash Balance Plan, tax deductible contributions of an additional $50,000 - $250,000 per year may be obtained depending on the age and income levels of plan participants.  Business owners or partners who want to “catch-up” on retirement savings. Cash Balance Plans provide a means to catch-up on retirement savings, particularly for individuals over age 40. Maximum annual contributions to a Cash Balance plan are age-dependent, so the older the participant, the faster they can accelerate their savings. This is because older participants have fewer years to save toward the approximate $2.4 million lump-sum that may be allowed to accumulate in a Cash Balance Plan.  Companies already contributing 3% or more to employees, or companies willing to do so. While Cash Balance Plans are often established for the benefit of owners or key executives, broad-based employees will also benefit. A minimum contribution of 7.5% of pay is typically provided for staff...

Website: www.pollardpensions.com | Filesize: 393kb
No of Page(s): 4
Download Cash Balance Plan Overview.pdf