There is a lot of interest in cash balance plans. Both clients and their advisors have been asking us about cash balance plans. This article will discuss what a cash balance plan is and how it works.
A cash balance plan is a type of defined benefit pension plan. It is subject to the same minimum and maximum benefit and contribution limitations as any other defined benefit plan. In addition, a cash balance plan is subject to the same nondiscrimination requirements as any other qualified retirement plan. A cash balance plan cannot discriminate in favor of owners or highly-compensated employees.
While a cash balance plan is a defined benefit plan, in many ways, it is similar to a profit sharing plan. Contributions to a cash balance plan are determined as a dollar amount or a percentage of compensation. In addition, a cash balance plan maintains a theoretical account for the benefit of each participant. A participant’s benefit at retirement is based upon the value of this theoretical account. A cash balance plan is easy for an employee to understand. The amount of the contribution made to his or her theoretical account is transparent. The participant sees the cash going into the plan each year. In contrast, a traditional type of defined benefit plan defines the benefit at normal retirement age. For a younger employee, who may not expect to work for one employer until normal retirement age, that may not be a meaningful benefit.
A major advantage of a cash balance plan is that it works well for larger employer groups. A cash balance plan can segregate employees by class, and the employer can make different levels of contributions to each class. However, the plan still has to meet the Code’s nondiscrimination tests. This may result in a higher percentage of the employer’s contribution going to fund the owner’s retirement benefit. In addition, a cash balance plan is a good option where a business has two or more owners, who receive equal compensation, but one owner is older than the others. In a traditional defined benefit plan, the employer would have to make a larger contribution for the older owner, because there are fewer years to fund his retirement benefit. A cash balance plan can be designed so that the contribution is the same for all of the owners, regardless of age. This eliminates any objection that the younger owners may have. Whether a cash balance plan is right for a particular employer depends upon the makeup of employer’s census.
A cash balance plan may or may not be the right defined benefit pension plan for your client. RMC Group will help you determine the best plan design for your client. A traditional defined benefit plan may be the best option for your client, especially where your client does not want a plan that requires the general testing of a cash balance plan. If your client is looking to maximize its contribution to a retirement plan, then a fully-insured 412(e)(3) plan may be the answer.
There is still time to establish a retirement plan for 2018. To begin the review and design process, we need a census with the names, dates of birth, dates of hire, hours worked and annual compensation of each employee. We will also need to know whether your client desires to make a specific contribution to the plan. CLICK HERE to fill out the census information online.
To get started, contact RMC Group today at 239.298.8210 or visit our website at rmcgp.com.