Cash Balance Plans

What are cash balance plans?

Cash balance plans are a type of defined benefit plan where a company makes contributions on behalf of all participants.  They are different because they offer much higher contribution limits than a 401k plan, especially for older participants.  They can contribute more than $200,000 a year after age 55, and it provides a guaranteed retirement benefit.  There is a big commitment to fund the plan and there needs to be professional oversight and management to comply with IRS rules.  Cash balance plans can be a great fit for business owners looking for ways to reduce their tax burden and save much more money for retirement than simply in a 401k plan and profit-sharing component.  In fact, in nearly all cases, cash balance plans supplement a 401k plan and associated profit-sharing piece.  Here are the 3 key benefits of a cash balance plan, and their potential drawbacks:

Cash balance plans allow you to save a lot and get big tax deductions.

Benefits:  Cash balance plan contribution limits increase with age.  No matter how old you are, the limits for a cash balance plan are always higher than those for a 401k plan.  Let’s look at a detailed comparison



401k+Profit Sharing

    Cash Balance

Tax Deduction

(401K+Profit Sharing+Cash Balance*45% combined tax rate)


Companies make those contributions for their plan participants, so the amount is deductible to the company.  For owners, those tax savings can flow through to their individual tax returns.   Savings grow tax deferred, so participants have potentially saved a much bigger pool of assets when they retire.  It is important to understand you can have a 401k plan, a profit-sharing plan with the 401k, and a cash balance plan, and are able to contribute the maximum to all.  As an example, in the chart below, a person aged 60-65 can contribute up to $344,500 in a single year if they maxed out the 401k, profit sharing plan, and cash balance limits.  One key point, the IRS limits the maximum saved in a cash balance plan to 2.9 million.

Potential Drawbacks- A cash balance plan is a large financial commitment.  They are best used by businesses with predictable incomes which have been consistent for a long period of time.  The IRS wants your plan to be in place for at least 5-7 years, and asks that contributions are similar during the entire time.  It is possible to change the contributions, but there needs to be a documented business reason.  You must cover 40% of your workforce, or up to 50 participants.  You also will be giving those employees from 3%- 7.5% of their salary.  Cash balance plans are a good fit for small businesses with an owner and a few employees, or law or medical enterprises which can cover both partners and administrative employees.

  • Plan participants earn a guaranteed benefit (rate of return).

Benefits: Savings in a plan participants cash balance plan won’t fluctuate based on investment performance.  There is an interest crediting rate (usually 4-6%), and participants get the contribution each year plus what they earn from the interest crediting rate.  Plan assets are pooled into one trust account and managed by professionals, and each employee receives a statement itemizing their own account balance.

Potential Drawbacks:  Owners must fund the plan and its interest crediting rate.  If the plan’s assets earn more than the crediting rate each year, the business owner gets to reduce the contribution the following year.  In the event the plan’s assets don’t earn the crediting rate, sponsors must make up the difference with more cash the following year. It is for this reason advisors and sponsors work with actuaries to design plans which fit and follow the interest credit rate amounts.

  • Cash balance plans are portable.

Benefits:  Plan participants can move jobs and rollover the cash balance amount into a rollover IRA, like a 401k plan.

Potential Drawbacks:  Cash balance plans are pooled accounts, and everyone has the same interest credit rate.  The investment account has the same investments for everyone.  There is no variation between participants on what investments each has.  Keep in mind the cash balance plan is typically used in combination with 401k plans and profit-sharing plans, which is where individual differences in investment approaches can be implemented.

If you would like to chat about your retirement planning situation, please go to the calendar and let’s set up a time to meet!

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