Cash Balance Retirement Plans
Parker Elmore, ASA, MAAA, EA, FCA
Supercharge Your Retirement and Increase Tax Deductions
The information provided is for reference only and should not be construed as legal or consulting advice. All ERISA, IRS & DOL statutes & regulations are complex and must be evaluated in relation to your particular circumstances. Please contact Odyssey Advisors, an independent third party administration firm, at (855) 401-GAIN for additional information related to your retirement plan questions.
What is a Cash Balance Plan?
A Cash Balance Plan (“CB Plan”) is considered an employer sponsored hybrid defined benefit pension plan (“DB Plan”). While a tradition DB Plan provides a monthly benefit at retirement, the CB plan expresses the benefit in terms of an “account balance” – very similar to a 401(k) in appearance. As such, it is much better understood & appreciated by employees.
How does it work?
A CB Plan will provide each participant a “pay credit” each year which is added to their “hypothetical account” which is also credited a guaranteed rate of interest each year (“Interest Credit”). The Pay Credit is usually some % of pay or dollar amount & can vary by partici- pant or group (i.e, 25% of pay to owners & 3% of pay to others) The Interest Credit will normally be a fixed rate such as 5% or tied to an index like US Treasuries. Both the Pay Credit and Interest Credit are defined in the Plan Document.
Can I have both a DB Plan and a 401(k) (“DC”) Plan?
Yes, in fact, the use of a 401(k)/Profit Sharing Plan in addition to the CB Plan will allow for greater tax deferral and deductions for the targeted group at a lower total cost. The reason is that benefits provided to Non-Highly Compensated Employees (“NHCE’s) can be done more efficiently in the Profit Sharing Plan to allow the combined plans to pass the necessary nondiscrimination tests.
Are there limits on the Interest Crediting Rate?
While you choose a fixed or variable Interest Crediting Rate, it must not exceed a “market rate of return”. Additionally, as this is a DB Plan, interest credits must always be positive.
Does it matter how old I am?
Yes, the tax deductible contribution amounts vary by age.
Is there a Maximum I can contribute each year?
The IRS limits total tax deductible employer contributions for the combined plans (DB & 401(k)/PS) to the greater of 25% compensation or the minimum required for the DB Plan. As the 1st 6.0% of DC contributions do not count toward the 25% limit, the effectively limit is 31% for non-PBGC covered plans. For PBGC covered plans, the 25% limit does not apply.
Why a Cash Balance Plan vs. Traditional Plan?
- Better understood by employees
- More predictable costs
- Better able to target key staff
- Ideal for professional groups
Cash Balance and 401(k)/PS Combo Example
Are benefits only paid in a lump sum?
No, as this is still considered a DB Plan, a participant must be offered various annuity forms of payment upon termination of employment and/or retirement. However, past experience shows that the large majority of participants will elect a lump sum payout upon distribution.
Why do I need Odyssey Advisors?
A CB Plan requires the use of an Enrolled Actuary as part of the annual administration including preparation of the Schedule SB of the Annual Filing (Form 5500) with the DOL. The Enrolled Actuary determines the amounts that may be contributed under the Plan and ensures the Plan complies with the relevant IRS regulations & statutes.