Bottom Line Up Front

• IRC Section 415 sets limits on retirement plan benefits and contributions, and exceeding them can trigger significant tax penalties and administrative complications.
• Defined Benefit and Cash Balance plans are especially vulnerable to overfunding, particularly when investment returns or contributions outpace allowable limits.
• Proactive monitoring—across funding, investments, and plan design—is essential to avoid surplus issues, stay compliant, and maintain long-term plan flexibility.

Download a PDF version of this article (Understanding IRC Section 415)

IRC Section 415 governs the maximum benefits and contributions allowed in qualified retirement plans. These rules are designed to prevent disproportionately large tax-advantaged benefits and ensure plans operate within IRS guidelines. While the limits may seem straightforward at first glance, the operational impact, especially for Defined Benefit and Cash Balance Plans, can be significant.

What is IRC Section 415?

IRC Section 415 sets maximum benefit and contribution limits for qualified retirement plans to ensure compliance and prevent excessive tax advantages. The limits differ depending on whether the plan is a Defined Benefit (DB) plan or a Defined Contribution (DC) plan. 

• Defined Benefit (DB) Plans: Annual benefit is capped at $290,000 for 2026 for a life annuity at age 65, adjusted for retirement age, payment form, and service years. 
• Defined Contribution (DC) Plans: Annual additions (employee + employer contributions) are limited to $72,000 for 2026 (excluding catch-up contributions).

Why It Matters

Section 415 isn’t just a technical rule, it directly affects funding strategies, plan design, investments, and tax outcomes. Exceeding the limit can create major issues, including taxes, penalties, and administrative complexity. 

Examples of Key Risks

• Surplus Assets: If plan assets exceed the 415 limit, any excess at termination may face a 50% reversion tax assessed by the Internal Revenue Service (IRS), plus corporate income tax on the remainder — potentially a 90% effective tax rate. 
• Funding risks: Large contributions or high investment returns can push plans beyond allowable limits, requiring extended plan duration to absorb surplus. 
• Investment Strategy: Cash Balance Plans invested aggressively (e.g., 100% equities) often generate returns far above the intended crediting rate, accelerating surplus risk.

Common Challenges for Plan Sponsors

Even well-managed plans face recurring complexities under Section 415, including: 

• Managing contributions to prevent overfunding
  Especially in years with strong investment performance. 
• Handling early retirement factors
  Benefits must be actuarially reduced, and the calculations can be complicated. 
• Accounting for joint & survivor or other optional forms of benefit
  Payment forms must be converted to an actuarial equivalent of a straight life annuity for 415 testing. 
• Monitoring potential legislative changes
  For example, if cost-of-living adjustments (COLA) are frozen due to legislation, current limits could stagnate even while plan liabilities continue to increase. 

Best Practices for Staying Compliant

Plan sponsors can reduce risk by being proactive and building 415 monitoring into annual strategic planning. 

• Monitor Annually
  Compare projected DB benefits or DC contributions against annual 415 limits.
  
• Align Investments
  Investment policies for DB/Cash Balance plans should support—not conflict with—interest crediting assumptions and long-term funding strategies.
  
• Plan for the Long Term
  Consider how contributions, plan amendments, and demographics may impact compliance over time. 

Recommended Actions

1. Annual Compliance Review
   Conduct an annual audit of plan assets, contributions, crediting rates, and projected benefits to identify potential 415 issues early. 
2. Investment Policy Alignment
   Ensure investment strategies match plan objectives and avoid excessive growth that could create surplus. 
3. Contribution Planning
   Coordinate with your actuary to structure employer contributions that meet objectives without pushing the plan toward overfunding. 
4. Scenario Testing
   Model early retirement, optional forms of payment, and alternative plan designs to ensure 415 compliance in all circumstances. 
5. Legislative Monitoring
   Stay current on IRS updates, cost-of-living adjustments, and proposed policy changes that could affect benefit limits.

Bottom Line

IRS Section 415 limits are technical, nuanced, and often misunderstood—but compliance isn’t optional. With the right monitoring and planning, employers can maintain tax-advantaged status, avoid costly penalties, and ensure long-term plan sustainability. 

If you have questions about how Section 415 applies to your retirement plan, your Odyssey consultant is here to help.

The post Understanding IRC Section 415 Limits and Key Issues appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• A Cash Balance Plan is a type of Defined Benefit Plan that allows large tax-deductible retirement contributions that are tax-deferred and protected from creditors.
• These plans are ideal for business owners and self-employed individuals who want to ramp up their retirement savings while reducing their tax burden.
• Typically, Cash Balance plans work best for people 50 and older, with stable, predictable, high income.

What is a Cash Balance Plan?

A Cash Balance Plan is a Defined Benefit Pension Plan, IRS § 401(a), often used by small business owners. It allows for significant tax-deductible contributions and retirement asset accumulation. Contributions are tax-deferred, and your assets are protected from creditors. In short, it’s an excellent tool for tax planning, asset accumulation, and asset protection.

Key Benefits of a Cash Balance Plan

Most business owners adopt a Cash Balance Plan to supercharge their retirement savings while taking advantage of generous tax deductions. Unlike 401(k) Profit Sharing Plans, these plans offer higher annual contribution limits, which means you can put away more for retirement and defer more taxes.

Potential Annual Retirement Savings & Tax Deferral for 2025

For a full breakdown of the 2026 cash balance plan and 401(k) contribution limits by age, see our 2026 CB Plan Contribution Limits PDF.

What is the difference between a Cash Balance Plan and a 401(k) Plan?

Both Cash Balance and 401(k) Plans are considered “qualified plans” under IRS § 401, but there’s a key difference:

• Cash Balance Plan: Defined Benefit Plan – the retirement benefit is defined, not the contribution.
• 401(k) Plan: Defined Contribution Plan – the contribution is defined, not the retirement benefit.

In a 401(k) plan, the employee assumes the investment risk. With a Cash Balance Plan, the employer bears that responsibility. Plus, Cash Balance Plans must offer a lifetime annuity option and are typically backed by the Pension Benefit Guaranty Corporation (PBGC), which provides insurance for such benefits.

Can I have a Cash Balance Plan if I already have a 401(k) or IRA?

Yes! Cash Balance Plans aren’t designed to replace your 401(k) or IRA – they’re meant to complement them. Think of it as stacking multiple retirement plans to maximize your savings potential.

Who Should Consider a Cash Balance Plan?

A Cash Balance Plan may be a good fit for you and your business if:

• Your company has fewer than 10 employees.
• The owners are typically older than the employees.
• You have a stable, high income with some predictability.

How does a Cash Balance Plan work?

Each participant in a Cash Balance Plan gets a “pay credit” every year, which is the amount the employer contributes on their behalf. The contribution can be a flat dollar amount or a percentage of income and may vary between employees and owners, as long as it passes compliance testing. For example, $1,000 annually per participant or 3% of a participant’s annual income. Each company’s funding formula varies based on the employer’s goals and their employee demographics.

Additionally, accounts earn interest on accumulated contributions each year, called interest credit. Usually, a fixed rate like 5% or tied to an index, such as the 30-year Treasury yield.

Self-employed? Yes, You Can Set Up a Cash Balance Plan

If you’re self-employed, a Cash Balance Plan can be a powerful retirement tool. You can combine it with other plans to significantly increase your retirement contributions.

What is the maximum amount I can get from a Cash Balance Plan?

As noted above, a Cash Balance Plan is a defined benefit plan, so there are limits on the maximum benefit that may be paid. IRS § 415(b) limits the benefit that may be paid from a defined benefit plan ($285,000 annually at Normal Retirement Date for 2026, indexed). This amount is reduced if the participant has less than 10 years of participation in the plan, as well as for retirement before the Normal Retirement Date. Assuming that the participant is at least age 62 with a minimum of 10 years of participation in the plan, the maximum lifetime lump sum payable from a Cash Balance plan is approximately $3.6 million for 2026 (indexed based on interest rates, mortality, etc.).

How much can I contribute to a Cash Balance Plan?

The maximum amount you can contribute is limited by your compensation and age. For example, if you earn $360,000, you could roughly contribute:

• $195,000 at age 40
• $280,000 at age 50
• $415,000 at age 60

Does a Cash Balance Plan Affect My 401(k) Contributions?

The tax deduction limit for the combined plans (Cash Balance & 401k) is greater than 25% of covered payroll and the minimum required funding for the Cash Balance Plan. However, if employer contributions to the 401(k) Plan do not exceed 6.0% of covered payroll, the 25% limit does not apply. If the Cash Balance Plan is covered by the PBGC, higher contribution limits will apply.

How is My Cash Balance Benefit Determined?

There are three main components to your Cash Balance benefit:

1. Pay Credits – Contributions are typically a percentage of compensation (typically on an annual basis).
2. Interest Credits – Usually a fixed rate or tied to an index (like the S&P 500 or Treasury rates). The interest credit frequency is defined by the plan but is normally credited annually.
3. Actuarial Equivalence – The plan outlines how the balance is converted to a benefit (lump sum or annuity) at retirement.

Can I Use a Vesting Schedule?

Absolutely! Cash Balance Plans can use a vesting schedule, typically no more than three years. Many plans use “cliff” vesting, where you’re 100% vested after three years, though some use graded schedules with partial vesting sooner. When an employee terminates employment before completing the required vesting service for 100% vesting, any non-vested amount is “forfeited” and may be used to offset or reduce the employer’s future contributions.

How Long Do I Need to Keep the Plan?

All qualified retirement plans, including Cash Balance plans, must be intended to be “permanent” at inception. While there’s no hard rule, it’s generally recommended to keep a plan in place for at least five years to meet the permanency requirement. However, unforeseen circumstances like a business sale or revenue change could justify an early termination.

Advantages & Disadvantages

The advantages are well known and often highlighted, but it is important to remember that large tax-deductible contributions and flexible plan design do carry the disadvantage of minimum required contributions.  

Investing Cash Balance Plan Assets

Unlike a 401(k) Plan, a Cash Balance Plan’s assets are pooled and invested by the employer. You should work with your investment advisor to determine an appropriate investment policy given the plan’s defined interest crediting method and the plan sponsor’s tolerance for contribution volatility. 

A conservative to moderate asset allocation (with 3-7% per year) is common to manage contribution volatility and prevent overfunding.

Is a Cash Balance Plan Right for You?

If you’re self-employed or own a business with steady income, are over 35, and want to boost your retirement contributions, a Cash Balance Plan could be a smart move. These plans are very common for professional services firms, but they work for any business with predictable income.

There are a lot of factors to consider when adding a new retirement plan as a business owner. An actuary who specializes in retirement plans, specifically defined benefit and cash balance plans, can help you understand if a Cash Balance plan is right for you based on your situation and goals. 

What is the deadline to establish a new Cash Balance Plan?

With the passage of the SECURE Act, the deadline to establish a plan is the business’s tax filing deadline (including extensions). The plan must be both executed and funded by that deadline, so it is important to begin working with an actuary and your financial professional well in advance of that date to ensure you can meet the deadline.

How Do I Set Up a Plan?

Start by working with an actuary to design the plan that fits your goals. You’ll also want to work with your financial advisor to establish a trust for plan investments. It’s best to allow four to six weeks for everything to be in place.

If you have questions on how to align your business needs with your personal goals, check out our form below. If you would like to get a free retirement plan review, you can reach out to us directly here. 

The post What is a Cash Balance Plan? Your Top Questions Answered appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Maximizing your contributions is key, with options like 401(k) plans, SIMPLE IRAs, and Cash Balance Plans providing tax advantages and flexibility.
• Flexibility and scalability are vital as your business grows, ensuring your retirement plan can adapt to workforce expansion and changing regulations.
• Regular reviews of your plan, compliance with legislation, and economic preparedness are necessary steps to secure a resilient and sustainable retirement plan for the future.

In today’s rapidly changing economic landscape, having a well-structured retirement plan isn’t just a perk for your employees – it’s a strategic investment in your company’s future. Small business owners, in particular, face unique challenges when offering retirement benefits, from maximizing tax advantages to navigating legislative changes. With evolving market conditions, new employee expectations, and shifting regulations, it’s never been more critical to ensure that your retirement is built to last.

Future-proofing your retirement plan means asking the tough questions now to avoid costly mistakes later. Is your plan flexible enough to grow with your business? Are you taking full advantage of tax incentives? Are you prepared for legislative changes that could impact compliance?

In this guide, we’ll review the key questions every business owner should consider to ensure your plan stands the test of time. Whether you’re already offering a plan or just starting, these insights will help secure both your business’s and your employees’ financial future.

Are You Maximizing Contribution Opportunities?

Each year, the IRS sets contribution limits for retirement plans like 401(k)s and profit-sharing plans. Are you contributing the maximum allowable amount? Missing these limits could mean leaving valuable tax-deferred growth on the table.

Business owners can often contribute more than employees through profit-sharing components or catch-up contributions if they’re 50 years or older, making this a prime area for tax savings and retirement growth.

• 401(k) Limits: The contribution limit in 2024 is $23,000, with an additional catch-up contribution of $7,500 for those aged 50 years and above (higher catch-up contributions are coming in 2025 for those aged 60-63).
• SIMPLE IRA Limits: Employees can defer up to $16,000 of their salary pre-tax, with a $3,500 catch-up contribution for those aged 50 years and above.

2024 Cash Balance Plan Contribution Limits

Does Your Plan Offer Flexibility for Growth?

As your business grows, your retirement plan needs to grow with it. A common mistake is setting up a plan that works well for your current size but doesn’t leave room for expansion. Your retirement plan should be flexible enough to grow with your business and adapt to changes in your workforce, revenue, and long-term goals.

Ask yourself:

• Can your plan scale with your business? Whether you plan to double your workforce or add employees gradually, your plan should allow for increased contributions as profits rise or provide options to enhance benefits without straining cash flow.
• Is your plan portable and adaptable? Employees are more likely than ever to change jobs. Offering portability (e.g., easy rollovers) and flexible vesting schedules makes your plan more attractive while supporting long-term employee retention.

Are You Prepared for Legislative Changes?

Retirement plan regulations are always evolving. Recent updates, such as the SECURE Act and SECURE 2.0, have reshaped the retirement landscape with changes like higher contribution limits and expanded eligibility for part-time employees. Keeping your plan compliant is crucial to avoiding penalties and missing out on tax benefits.

Key steps to take:

• Regular plan reviews: Work with your administrator or actuary to ensure your plan aligns with the latest legislation, like changes to required minimum distributions (RMDs), or auto-enrollment provisions.
• Maximizing tax incentives: Under SECURE 2.0., small businesses starting new plans may qualify for increased tax credits, and features like automatic enrollment or matching or matching contributions can unlock additional savings.

Have You Accounted for Economic Uncertainty?

No one can predict the future, but a resilient retirement plan should be prepared to handle market fluctuations, recessions, inflation, and other economic challenges.

Is Your Investment Strategy Diversified?

A well-diversified investment strategy is key to weathering economic storms. Offering a mix of conservative and growth-oriented options like equity, bonds, and stable value funds helps manage risk. Diversification is also crucial for businesses – evaluating the plan’s risk exposure and using flexible matching formulas can maintain financial stability without overextending resources.

Can Your Plan Handle Economic Shocks?

Retirement plans must be built to withstand economic shifts. According to data from the Center for Retirement Research at Boston College, the average retirement age for men is 65, and for women, it’s 63. Assuming most people start saving at around age 25, that’s at least 35 years of managing retirement savings before tapping into them.

Think about the last 35 years: we’ve seen significant economic events, the most recent being the COVID-19 pandemic. This disruption underscored the importance of flexibility, as many companies had to adjust or pause distributions. Ensuring your plan includes loan or withdrawal options for employees facing financial hardship can offer them a safety net without compromising their long-term savings goals.

Do You Have the Right Team?

An experienced team of professionals – actuaries, recordkeepers, plan administrators, and financial advisors – is essential for designing and maintaining a successful retirement plan. They help ensure compliance, manage risk, and optimize contributions.

Key Roles:

Actuary: Modesl scenarios based on business growth and market conditions to keep the plan sustainable.

Recordkeeper: They provide the investment vehicles, track daily balances for each participant, and facilitate distributions.

Financial Advisor: Helps select investment options that align with employee goals and risk tolerance.

Plan Administrator: Whether in-house or a third-party administrator, they ensure the day-to-day operations run smoothly, from timely contributions to monitoring compliance and addressing regulatory changes.

Are You Conducting Regular Plan Reviews?

Regular annual or semi-annual reviews can ensure your plan remains compliant, competitive, and aligned with your long-term goals. These reviews should cover:

• Plan participation and employee engagement
• Investment performance and risk management
• Compliance with the latest legislation
• A cost-benefit analysis of employer contributions

By conducting regular reviews, you can spot areas for improvement and ensure your plan continues to meet both your financial and operational objections.

Future-Proofing Starts Now

A well-structured retirement plan can be one of the most valuable assets you offer your employees, helping attract and retain top talent. Future-proofing is an ongoing process that requires flexibility, expert guidance, and regular reviews. At Odyssey Advisors, we specialize in designing and administering customized retirement plans tailored to your company’s goals. Whether you’re starting a new plan or refining an existing one, we’re committed to being your partner for the long haul.

Ready to future-proof your retirement plan? Contact Odyssey Advisors today to schedule a consultation.

Disclaimer: None of the above information should be construed as financial, investment, or legal advice. Please consult your financial advisor or ERISA attorney to address your specific needs.

The post Is Your Retirement Plan Really Future-Proof? Critical Questions Every Business Owner Should Ask appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• An employer fiduciary is responsible for acting in the best interest of the 401(k) plan’s participants and beneficiaries, ensuring compliance with the Employee Retirement Income Security Act (ERISA) which sets the guidelines and regulations that employers must follow to fulfill their duties.
• The three key responsibilities of an employer fiduciary encompass carrying out administrative tasks, keeping 401(k) provider fees in check, and providing diversified quality investment opportunities.

If you’re a small business owner considering the implementation of a 401(k) plan for your business, it’s important to understand your responsibilities as a plan fiduciary, including compliance with the Employee Retirement Income Security Act (ERISA). As an employer fiduciary, your primary duty is to act in the best interest of the plan’s participants and beneficiaries, ensuring their well-being. This entails not only maximizing returns for the participants, but also adhering to ERISA compliance guidelines. While there are various fiduciary responsibilities, this article focuses on three key obligations that are essential for any small business owner venturing into the realm of 401(k) plans. 

Carry Out Administrative Tasks in a Timely Manner

There are numerous administrative tasks that are the responsibility of the employer fiduciary. One of the most crucial responsibilities is operating the 401(k) plan in accordance with the plan document. This includes ensuring deposits are made correctly and on time, as well as making sure any distributions are made in a timely fashion. Adhering to the plan document helps maintain consistency and ensure compliance with ERISA regulations.

Another important duty of the employer fiduciary is to keep track of employee eligibility and ensure that contributions are made once the employee becomes eligible to participate in the plan. It’s crucial to monitor eligibility criteria and notify employees of their eligibility (unless you have established automatic enrollment) to provide them with the opportunity to save for retirement.

The fiduciary must also make sure to maintain records in accordance with ERISA standards. Proper record-keeping is vital for demonstrating compliance with fiduciary responsibilities and providing transparency. It also helps come audit time.

Furthermore, you are also responsible for conducting any necessary plan testing, such as discrimination testing – this is normally outsourced to a firm like a Third Party Administrator (“TPA”). These tests are designed to ensure that the plan does not unfairly favor highly compensated employees over non-highly compensated employees. 

For detailed information on ERISA standards and regulations related to these administrative responsibilities, you can refer to the Department of Labor (DOL) website, which provides comprehensive guidance on ERISA compliance: Department of Labor – ERISA Compliance.

Keep 401(k) Fees in Check

Plan fees remain an important area of fiduciary oversight. Fiduciaries should regularly review both investment expenses and service provider fees to ensure they remain reasonable for the services provided. As a plan sponsor, you have the authority over plan assets meaning you decide which funds will be allowed or offered in the plan. You are expected to understand the fees that your 401(k) participants will incur based on their decisions. It’s important to weigh the benefits and the costs – your provider may offer many additional services and that may be desirable even at a higher cost. Fiduciaries can: 

• Determine the current costs being paid and to whom and request itemized documentation
• Compare fees charged by different providers

There are three different fees associated with a 401(k) plan which are administrative, investment, and consulting fees. By carefully monitoring and evaluating the fees, you can safeguard the long-term financial well-being of your plan participants.

Provide Diverse and Quality Investment Opportunities

ERISA doesn’t require fiduciaries to select the best-performing investments. Instead fiduciaries should establish a prudent process for selecting, monitoring, and replacing investments while offering participants a diversified lineup that meets the needs of the plan. Investment options should be reviewed regularly and evaluated against appropriate benchmarks and peers, not simply the highest-performing funds of the moment. 

To Wrap It Up

A fiduciary has many responsibilities in regards to a 401(k) plan. However at the root of all responsibilities is to act in the sole interest of the plan’s participants and beneficiaries. Employer fiduciaries must handle plan administration, try to limit fees, and offer diversified investment options in order to give provide participants with a well-managed retirement plan that’s operated in accordance with ERISA’s fiduciary standards. 

Although these responsibilities may seem daunting, there are experts in the field who will gladly help. Take the worry out of retirement plan administration and let Odyssey Advisors be your trusted partner in building and managing your company’s retirement plan. Our expert team will handle the complex responsibilities, so you can focus on what you do best. Say hello to peace of mind and contact us today!

Frequently Asked Questions About 401(k) Fiduciary Responsibilities

Who is considered a fiduciary of a 401(k) plan?

Under ERISA, a person may be considered a fiduciary based on the functions they perform for the plan, not simply their job title. This can include individuals who exercise discretionary authority over plan management or assets, provide investment advice for a fee, or have responsibility for plan administration. 

What are the main fiduciary duties under ERISA?

ERISA generally requires plan fiduciaries to act solely in the interest of plan participants and beneficiaries, carry out their duties prudently, diversify plan investments, follow the plan’s governing documents, and ensure the plan pays only reasonable expenses. 

Can a 401(k) fiduciary be personally liable?

Yes. Fiduciaries who breach their responsibilities under ERISA may be personally liable for losses to the plan resulting from the breach. This makes having—and documenting—a prudent fiduciary process especially important. 

Does ERISA require fiduciaries to choose the best-performing investments? 

No. Fiduciary prudence isn’t determined simply by which investment ultimately produces the highest return. Fiduciaries should follow a prudent process when selecting and monitoring investments based on the information reasonably available at the time of the decision. 

The post Top 3 Fiduciary Responsibilities Every 401(k) Plan Sponsor Should Know appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Offering a 401(k) plan can help small businesses recruit and retain top talent and provide significant tax breaks and deductions.
• Finding the best retirement plan for your business requires an in-depth look at what your goals are, where your business is at, understanding what each plan has to offer, and more.
• This article is for businesses who want to know if they should also offer a Roth 401(k).

Congrats! You’ve reached the stage in your business where it’s time to set up a 401(k) plan. The availability of a 401(k) raises the status of your company and demonstrates your commitment to your employees’ future. Aside from the tax savings (which are pretty great when it comes to that increasingly stressful bottom line), offering good benefits leads to better morale, having employees stay with you longer, and attracting the right employees.

If you landed on this article, you’re probably debating on whether to add a Roth option along with the traditional 401(k). If so, sit back, relax, and grab a beverage of your choosing because I’ll show you why a Roth 401(k) is a good ace to have up your sleeve.

Finding the best retirement plan for your business

First, you want to look at a few factors that will help aid your decision. What does the structure of your business look like (are you set up as an S corp, an LLC, etc.)? What are you looking to get out of the plan?

Each company is unique. There’s not a one-size-fits-all, not even a one-size-fits-most plan. You’ll want to look at the tax advantages, understand what your long-term goals are (succession planning, how long you plan on owning the business, etc.), and where you’re at in your business.

For example, a business owner that has 10 employees, may still be dedicating most of their time to the business. They’ve got enough on their plate so the conversation might be focusing on how they can have a retirement plan that will attract employees and retain their current ones, while not having to spend a lot of time focusing on the administration of the plan.

But it’s important to note, that while a 401(k) is usually targeted toward businesses with hundreds of employees, that’s not to say that a small business shouldn’t open one. These plans have a lot of advantages that you can’t get with another plan so it may still be a good idea to explore even if you have one employee.

Can an LLC member contribute to a 401(k)?

But if you’re reading this you’ve probably already done a fair amount of research. So let’s look at how a Roth 401(k) option can enhance your current or future traditional 401(k).

How a Roth 401(k) compares to a Traditional 401(k)

Both the Roth and pre-tax (traditional) 401(k) options are tools for you and your employees to save toward retirement. The biggest difference between a Roth 401(k) and its traditional counterpart are the taxes. With a Roth 401(k), you pay taxes now and with a traditional 401(k), you pay taxes later.

Here’s a quick side-by-side rundown of how these two plans compare:

Top 5 benefits of a Roth 401(k)

1. Earnings grow tax-free
   
   Because contributions are made after taxes have already been taken out, that means any earnings accumulated grow tax-free.
   
   
2. Ability to rollover to a Roth IRA
   
   Like a traditional 401(k), a Roth 401(k) is subject to required minimum distributions (RMDs) at age 72. A Roth IRA, however, is not. One benefit of choosing the Roth option is that you can roll over your 401(k) into an IRA and avoid having to make RMDs.
   
   
3. Higher contribution limits than an IRA
   
   The annual contribution limit for a traditional and Roth 401(k) for 2022 is $20,500 (or $27,000 if you’re age 50 or older). This is much higher than the IRA contribution limit which is $6,000 ($7,000 if you’re age 50 or older).
   
   401(k) and Retirement Plan Limits for 2022
   
   
4. Tax-free distributions during retirement
   
   Contributions are made after-tax which means that qualified withdrawals in retirement are tax-free as long as you have met the 5-year rule. You must have your Roth 401(k) account for a minimum of 5 years in order to make a tax-free distribution.
   
   
5. Advantageous for those who believe their tax rate will be higher in the future
   
   Let’s say you’re paying 12% in federal taxes and you plan to make more money in the future. This means the rate at which you’re currently taxed will most likely be higher in the future. This is often the case for younger employees and those near the beginning of their careers.
   

A great way to think about it – you’ll get your taxes out of the way early on at a lower rate and then you get to enjoy the earnings later on in life without the headache of taxes.

For example:

Assuming someone who is making $40k at the beginning of their career and paying very little in federal tax, plans to make more as they advance, a Roth 401(k) will only be marginally more expensive than a “regular” 401(k) at first. Down the line, when they’re ready to withdraw funds in retirement, it will be much cheaper.

The Bottom Line

Whether you’re already sponsoring a 401(k) plan or are looking into opening a traditional 401(k), adding a Roth option gives your employees the choice to choose how they’d like to save for their retirement. If you want to learn more about these two plans and other investment options, it’s always a good idea to reach out to an investment professional, a financial advisor, and/or a retirement consultant.

Whenever you’re ready, here are three ways we can help:

1. Business owners, get a free review of your current retirement plan design here. 
2. Minimize your tax burden and secure your employees’ futures here.
3. Financial advisors, help your clients defer income while providing retirement benefits for their employees here.

The post Should You Offer a Roth 401(k) Option? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Most business owners who adopt a Cash Balance plan are looking to accelerate their retirement savings and take advantage of the huge tax deduction benefits
• But not every business is a good fit for a cash balance plan
• The top 5 signs that a CB plan is right for your business include having fewer than 10 employees, high & predictable/growing income, high pass-through income, neglected personal retirement savings, and maximum contributions to your current 401(k) type plan.

As a small business owner, you are responsible for setting up a qualified retirement plan to support you and your employees. One possibility is a Cash Balance (CB) plan. A CB plan is a type of Defined Benefit Pension Plan that’s often used by small business owners. Most business owners who adopt a CB plan are looking to accelerate their retirement savings and take advantage of the tax deduction benefits. 

The following 5 signs could determine if implementing a cash balance plan for your small business would be beneficial:

1. Your company has fewer than 10 employees
2. You have high & predictable/growing income
3. You have high pass-through income
4. You’ve neglected your personal retirement savings 
5. You’re contributing the maximum amount in your current plan

1. Your company has fewer than 10 employees

While CB Plans can work for companies of any size, they are well suited for small companies with fewer than 10 employees. These plans require annual contributions by the employer on behalf of the owner and employees. As the number of employees increases above 10, the liability for these employees begins to become unmanageable, suggesting that a different retirement plan may be a better fit.

Another benefit of the Cash Balance plan is that when it is paired with a profit-sharing plan, it allows a large percentage of the benefits to be steered to the target group (e.g., owners). This benefit fades as the number of employees enrolled in the plan increases. 

2. You have high & predictable/growing income

CB plans are a better fit for small businesses that are well established. These older businesses typically have more capital available to take advantage of the increased contribution limits under Cash Balance plans. Young companies trying to make ends meet most likely lack the excess capital to truly take advantage of the higher contribution limits. Businesses with more capital and steady income streams are better equipped to make the required contributions in good years and bad. 

3. You have high pass-through income

Small business owners can face greater taxes as a result of income from their business being taxed on their personal tax returns, also known as pass-through income. Implementing a Cash Balance plan can greatly reduce these taxes. Due to the fact that CB plans allow larger contributions, business owners can contribute more of their income to the plan, therefore, reducing their taxable income (both State & Federal) and the amount of taxes they owe. Contributing to a CB plan reduces the taxable income while the contributions grow on a tax-deferred basis in the plan. 

4.  You have neglected your own retirement savings

If you’ve neglected your own retirement savings in the past, that makes you a prime candidate for a Cash Balance plan. 

It’s also one of the main reasons most small business owners decide to open a CB plan. The contribution limits for CB plans are determined by age and salary, which is advantageous for older business owners who are looking to contribute large sums. The higher contribution limits would allow you to catch up on your retirement savings quicker than a 401(k) plan. The contribution limits increase with age allowing for the opportunity to contribute more each year as you near retirement.

5. You are already contributing the maximum amount in your current 401(k) type plan

Installing a cash balance plan can be very advantageous for small business owners who are already contributing the maximum amount in their current plan. As seen in the table below, Cash Balance plans have much higher contribution limits than a 401(k) plan, especially for older contributors. As mentioned above, this is good for older business owners that are looking to catch up on their retirement savings. Beware that the use of a CB Plan may reduce the amount that can be contributed to the 401(k) type plan but the increased CB Plan contributions are far higher than that reduction.

How much can you contribute to a cash balance plan?

Higher contribution limits can also reduce the amount of taxes that you would need to pay each year since a portion of the income is now being allocated towards the CB plan.

In Closing

There are a lot of factors to consider when adding a new retirement plan as a business owner. If you are an owner with stable or accelerating income, and you want to significantly increase your retirement contribution then a cash balance plan may be a good fit for you. 

Whenever you’re ready, here are three ways we can help:

1. Business owners, get a free review of your current retirement plan design here. 
2. Minimize your tax burden and secure your employees’ futures here.
3. Financial advisors, help your clients defer income while providing retirement benefits for their employees here.

The post 5 Signs a Cash Balance Plan is a Good Fit for Your Small Business appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Cash balance plans are considered a Defined Benefit plan which adheres to a different set of rules and allows for a much larger contribution limit than a 401(k).
• The actual maximum amount someone can contribute annually to a cash balance plan varies from person to person based on their age and compensation.
• Below is a general guideline and estimate annual contribution limits based on age, but keep in mind that the actual amounts must be calculated by an actuary.

As a business owner, you’re in control of both the monetary and operational decision-making for your company. And with your company’s growth comes tax planning (or rather planning ahead for taxes). It’s easy to put tax planning on the back burner because it’s probably the last thing you want to deal with. However, if you’re a high-income business owner, cash balance plans (CB plans) are one of the best tax-sheltered retirement plans available.

How Much Can I Contribute to a Cash Balance Plan?

It depends on how old you are. The nice thing about these plans is that the older you are the more you can contribute based on various limits imposed by the government. Below is a graph showing estimates of annual contribution maximums based on your age.

Keep in mind, that these IRS contribution figures are only estimates. The actual amounts must be calculated by an actuary.

These amounts are based on a 10-year or less time period. Any plan over a longer time period will result in lower annual contribution amounts.

Essentially, the goal of a cash balance plan is to generate a specific amount of money by retirement. Let’s take a look at a quick example:

We have two owners of two different companies, one 40 years old and the other 55 years old. For the sake of the example, they both make $300,000 annually and both have a CB plan with the goal of having $3 million in their account by the time they terminate the plan.

Let’s say their goal is to cash out when they reach age 65. The 40-year-old owner has 25 years left until they hit 65 years old while the 55-year-old owner only has 10 years left until they hit 65 years old. This means that the contribution amounts (and annual tax deductions) would be smaller for the 40-year-old, but much higher for the 55-year-old.

Why are these amounts higher than a 401(k) plan?

A CB plan is considered a Defined Benefit plan, which adheres to a different set of contribution rules as prescribed by the IRS. These rules allow for considerably higher contributions than the limits for a 401(k) plan (a cash balance plan contribution can reach $245,000 per year compared to a 401(k) maximum contribution of only $67,000 per year including catch-up contributions in 2022). This higher limit comes with additional mandatory funding requirements. However, with a predictable and sufficient amount of cash flow, this can be an attractive option.

Are Cash Balance Plan Contributions Tax-Deductible?

Yes, all contributions made to a CB plan are tax-deductible as an ordinary business expense (above the line) as long as they do not exceed the maximum tax-deductible amount calculated by your actuary.

Differences Between Defined Benefit and Defined Contribution Funding Requirements

Defined Contribution (401(k) & Profit Sharing) plan funding requirements are largely discretionary. Defined Benefit (cash balance) plans, however, have minimum funding requirements as calculated by your actuary. When deciding whether to have a CB plan or not, you need to be certain that even if you are in a bad year (low cash flow) you can make the minimum required contribution. If you do not contribute enough to the plan you are then subject to penalties as well as excise taxes.

Generally, when designing your cash balance plan your actuary will provide you with a funding range that includes a target funding amount as well as minimum and maximum funding amounts. So if your business tends to fluctuate year over year, you’ll have some flexibility when it comes to your contributions.

If you have any questions, we’d be happy to help. You can reach me or another Odyssey consultant by dropping us a message here.

The post How Much Can I Contribute to a Cash Balance Plan? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• The maximum 401(k) contribution for 2022 is $20,500, a $1,000 boost from 2021’s contribution limit
• 401(k) catch-up contributions remain the same at $6,500
• Maximum contribution limits for defined benefit plans increased by $15,000

The IRS recently released the new plan limits for 2022 and employee 401(k) contribution limits increased to $20,500, a $1,000 boost from the current 2021 contribution limit of $19,500.

The tables below show key 2022 limits side-by-side with the current 2021 and previous 2022 limits. If you’re a financial advisor, these charts are a great way to start conversations with clients on plan redesign, tax-efficient combo plans, and talent retention & recruitment for the year ahead.

What are the new 401(k) plan limits for 2022?

What are the 2022 limits for non-401(k) related plans?

Download the full whitepaper: 401(k) Plan Limits & Non-401(k) Related Limits

Bonus whitepaper: 2022 HSA and HDHP Limits

What is the 2022 contribution limit for IRAs?

This limit did not change for 2022 so it is still $6,000. The catch-up contribution also remained the same at $1,000.

If you’d like a closer look at these and other retirement-related limits for 2022, please refer to the IRS Notice 2021-61, released November 4th, 2021.

Advisors, if you’re interested in a more in-depth retirement plan comparison chart or a free retirement plan review, drop us a quick note here and we’ll have one of our consultants reach out to you.

The post 401(k) and Retirement Plan Limits for 2022 appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Your retirement plan can increase your retirement savings, reduce your income taxes, recruit and retain top talent, and be fully compliant with all government requirements at the same time. That’s where a third party administrator (TPA) comes in.
•  A TPA or retirement plan consultant design and manage retirement plans that align a company’s needs with its goals while keeping up on the latest compliance legislation. 
• Your financial advisor may have recommendations for a TPA, but make sure you do your own research to ensure you select the right partner for your business.  

Your retirement plan should be like a financial Swiss army knife for your business.  If designed and managed right, it can reduce your income taxes, attract, recruit, and retain top talent, and increase your retirement savings. 

Third party administrator (TPA), retirement plan consultant, and ERISA consultant. As a business owner, you’ve probably heard one of these job titles before, but who are they and what do they do?

TPAs work in conjunction with you and your financial advisor to design, manage, and ensure your retirement plan meets compliance requirements and handles daily administrative tasks. Many small to medium businesses (SMBs) choose to work with TPAs to ensure they offer competitive plans that check all the above. 

Why You Should Consider Hiring a Third Party Administrator

There’s a saying that I’d be willing to bet you’ve heard before, “you don’t know what you don’t know.” That’s never been more true when it comes to retirement plans. There isn’t a one size fits all plan. So when you’re ready to look into retirement plans for your company, you should consider finding a partner with vast knowledge on plan design, ERISA regulations, and business strategy. 

TPAs work with business owners to design employee benefit plans to meet their goals – whether that’s to maximize contributions, reduce tax liability, or increase plan participation. They also ensure that it meets the Department of Labor (DOL) and IRS regulations. 

In addition, they also maintain and manage a retirement plan’s compliance. They’ll collect information such as annual census data to prepare your annual tax returns and compliance testing. In a majority of retirement plans that are audited, they uncover ERISA violations that pertain to how the plan document was interpreted. These fines can be costly so working with a knowledgeable TPA is crucial to ensuring you comply with ERISA regulations.

Retirement Needs & Goals Evolve Over Time

There’s common progression throughout the life of a business when it comes to its retirement plan. It typically corresponds with the size of the company and how profitable they are. For example, when you first start your business, funding a retirement plan isn’t likely to be on your radar since you’re still trying to bring in a steady cash flow. 

Once your business starts generating a healthy cash flow and you’re streamlining more processes, that’s when you’re ready to start thinking further ahead. A lot of businesses in this stage will look into a Savings Incentive Match Plan for Employees Investment Retirement Account (SIMPLE IRA). It’s a tax-deferred investment plan that requires little administration. 

As your business continues to grow and you start hiring more employees, you’re going to want a more competitive and flexible plan. SIMPLE IRAs are easy to maintain, but they have lower contribution limits, are priced per person (more employees = higher cost), and don’t attract high-end talent. This is where you’ll start looking into 401(k) plans. 

The main triggers for switching to a 401(k) plan: 

• You and your employees want to save more 
• The option for Roth contributions
• Income tax savings opportunities 
• Increased plan flexibility with the options to add additional features

With a 401(k) plan, you’ll also have the option to adopt a cash balance plan. Think of it as a bonus plan that allows large contributions for key stakeholders within the company – typically $100,000 or more and are fully tax-deductible. 

4 Things to Consider When Hiring a TPA

When you’re ready to establish a 401(k) plan for your business, that’s when you should consider hiring a third party administrator. Similar to when you hire a lawyer or accountant, you’ll want to make sure that your goals and needs match the services they provide. You’ll also want to make sure they are highly knowledgeable on the laws and regulations that pertain to retirement plans.

Here are some factors you should consider when hiring a retirement plan consultant/TPA: 

1. Compliance. This is at the top of our list because it’s the most important. In a typical year, thousands of new regulations and laws are issued in regard to employee benefit plans. However, over the past year and a half, the standard number of laws and regulations has doubled due to the pandemic. The best piece of advice I could give you is to give this area some due diligence when looking at different consulting firms. Ask them how they stay up-to-date on pending or new regulations and how they ensure that your plan will maintain full compliance with all government requirements. 

2. Communication. Since they are a service provider, you will be working with them frequently. Your relationship with the consultant will be based on trust, transparency, cooperation, and partnership. Having good communication is key in order to make sure they select the right retirement plan for your business and your goals. Your TPA will also need to work alongside your financial advisor.

3. Cost. Make sure to review more than just the firm’s fees when making your decision. Can they help you minimize claim and administrative fees? Good firms have been known to reduce these costs, sometimes even less than if you were to handle the administration on your own. Make sure to ask about all of the services they provide and any fees associated. 

4. Experience. Don’t only ask how long they’ve been in business. Instead, ask if they’ve worked with clients similar to you and if they can send you the scope of what they’ve done for them, numbers included. Do they have any case studies they could show you? Ask them to show you, rather than tell you.

Partnering with the right TPA/consultant can be a great asset for you and your company. It’s a small price to avoid the hassle that goes into choosing and managing your retirement plan on your own. If you have any questions or need further information, please contact us. No strings attached.

The post Here’s Why You Need a Third Party Administrator (and How to Hire the Right One) appeared first on Odyssey Advisors, Inc.

On February 12, 2021, the House Ways and Means Committee approved additions to the new COVID-19 relief package that will most likely be approved by the end of February. It includes key elements related to single-employer plans including 401(k) and defined benefit plans.  

The legislation is being prepared to come up for a House vote on February 26, 2021, followed by a Senate vote. Their goal is to approve the new relief package prior to March 14th, 2021 – before the current federal unemployment benefits expire.

Single-Employer Plan Provisions

1. Section 9705 – Extended amortizations. The legislation modifies shortfall amortizations from the current 7-year period to now 15-years for plan years beginning after December 31, 2019. However, the plan sponsor has the option to elect plan years beginning after December 31, 2018. 
2. Section 9705 – Zeroing out of existing amortization bases. The legislation would zero out any existing amortizations for plan years beginning before December 31, 2019 and again, the sponsor has the option to elect plan years beginning after December 31, 2018. 
3. Section 9706 – Extension of pension funding stabilization percentages. This would extend the phase out adopted in prior pension relief legislation in 2012, 2014, and 2015 which was intended to address historically low interest rates.
   1. The key point is that it would establish a 5.0% floor on the 25-year interest rate averages for the 1st, 2nd, and 3rd segment interest rates. This would further reduce ERISA minimum funding liabilities and require minimum contributions.
4. Section 9708 – Cost of living adjustment freeze.  For plan years beginning after December 31, 2030, the legislation would freeze any cost of living adjustments at the 2030 calendar year level for: 
   1. The compensation limit under IRC § 401(a)(17) would be frozen at the 2030 level (for 2021, the limit is $290,000 for qualified plans) so this would limit the profit-sharing contributions and defined benefit accruals for higher income earners.
   2. The total account addition (excluding catch-up contributions) under IRC § 415(c) would be frozen at the 2030 level (for 2021, this amount is $58,000 or 20% of the $290,000 compensation limit under IRC § 401(a)(17)).
   3. The maximum annual benefit payable from a defined benefit pension plan under IRC § 415(b)(1)(A) would be frozen at the 2030 level (for 2021, this amount is $230,000). 
   4. The COLA freeze feature of the legislation would NOT apply to a plan maintained in relation to a collective bargaining agreement. 

What This Means

Keep in mind that this is only a markup and the legislation has yet to be passed by the House or the Senate as of the date this article is published. Even though it is not yet in effect, it provides guidance as to where the legislation is likely to go so that you can prepare in advance. While the proposed legislation would provide funding relief to single-employer plans, the cost-of-living freeze in 2030 is likely to make smaller qualified retirement plans less attractive to business owners.

Odyssey Advisors seeks to stay up-to-date with pending legislation to keep our clients and partners informed. If you have questions, please reach out to an Odyssey consultant for more information.

The post House Committee Advances Single-Employer Pension Plan Provisions for the New COVID-19 Relief Package appeared first on Odyssey Advisors, Inc.