|
Cash Balance PlansCash Balance Plans are a type of defined benefit plan, yet operate much like a defined contribution plan. Plans are funded by employer contributions and then given a guaranteed interest credit, regardless of actual investment/market performance. Participant accounts are maintained by our actuary and are of known value much like a 401(k) or profit sharing account. Upon retirement or termination of employment, a participant will receive the vested portion of his/her account. These fund may be rolled over into an IRA from which the participant may take annual distributions, taken as an annuity, or taken as a lump sum.
|
As Business Grows, So Can Your Plan's Design |
We have a client who first came to us with a request for a 401(k) Profit Sharing Plan. It was a straight forward plan design with a controlled group (husband and wife each had their own company, but worked under the same office and shared employees). We were able to provide a suitable 401(k) Plan with two adopting employers, with a Safe Harbor Match and an optimized Profit Sharing Provision ($53,000 total for for each owner). The plan operated smoothly for 3 years.
In the fourth year, the owners noticed their revenues increasing consistently and steadily and their tax burden followed. They came to us asking for additional methods to make tax deductions and save for retirement and we initially suggested a Defined Benefit Pension Plan. The proposal we came up with was a good proposal to provide for significant tax benefits, unfortunately, the cost of providing for employees was beyond their desired budget. We then input the census data under a Cash Balance Plan. The maximum contribution we were able to calculate in combination with the existing Defined Contribution Plan was $261,000 for all employees with the two owners retaining $253,000 on an annual basis, or a 97% retention rate. Needless to say, the client was very happy with the results. |
The Most Basic Cash Balance Plan Design
|
A client was referred to us by a CPA last year and had a fun (and relatively easy) challenge for us. She worked as a contractor for a publicly traded research and diagnostics laboratory. The company paid her corporation directly and she asked for a solution where she took the least amount of salary as possibly with the highest deduction allowable. The laboratory paid her corporation $300,000 annually and she was the sole employee of her S-Corp.
Since her corporation was newly formed, we could not take advantage of past service credit, but instead were able to get her started on a basic 1:1 benefit formula in a Cash Balance Plan. The W2 salary she paid herself from her corporation would equal her required Cash Balance Plan contribution. We then added on a 401(k) Profit Sharing Plan to further reduce her tax liability. $300,000 Gross $30,000 Expenses $125,000 W2 Payroll $125,000 Cash Balance Pension Contribution $25,000 401(k) Salary Deferral (she was above 50 years old) $7,500 Profit Sharing Employer Contribution Net after deductions: $12,500. Tax deductible total: $157,500 Each year, we can start applying some service credit and amend the plan's benefit formula should the client need stronger tax deductions. |