Cash Balance Plans
Josephine Ballard, MS
Financial Manager, ABC
In the Winter 2009 Communiqué issue Jill Thompson wrote an introductory article featuring the highlights of a Cash Balance Plan. The article proposed that individuals earning $245,000 or greater may be interested in pursuing this retirement vehicle as a means for increasing their retirement funds while gaining the benefit of additional tax savings. To determine if a Cash Balance Plan is suitable for your practice an initial understanding should be obtained of the administrative and funding differences between a Cash Balance Plan and a Traditional 401(k) plan. Table 1 illustrates the major differences between the two plans.
As discussed in the 2009 article companies with the following characteristics are good candidates for Cash Balance Plans:
- Owners who desire to contribute more than $49,000/$54,500 per year;
- Owners over 40 years of age who desire increased tax deductions or wish to increase their pension savings;
- Companies that have demonstrated consistent profit patterns; and
- Companies that are already contributing 3% or more to employees’ accounts or are at least willing to do so.
In addition to a “stand alone” Cash Balance Plan one can opt for “combo” plans. These plans allow a Cash Balance Plan to be combined with a tradition 401(k) plan in order to provide for a larger contribution amount and allows combination with a whole life policy as well. For groups or businesses that are closely held, these types of “combo” policies are very common as they allow owners to maximize their retirement plan contributions. Furthermore, for groups with owners and a few employees the group can offer the option of some of the employees being covered under the cash balance plan and another group of employees being covered under the profit sharing plan.
Table 2 shows a Case Study of a small physician group with one employee that meets the requirements for a Cash Balance Plan. Table 2a illustrates the group’s self deferral and employer profit sharing levels for their current defined contribution plan. It also depicts that the average employer contribution expressed as a percentage of pay for principals is 13% and 6% for non principals. The group’s desire was to increase their pre-tax contributions to meet their retirement needs. Table 2b depicts a defined contribution plan combined with a cash balance plan at the maximum funding levels. Table 2b illustrates that the cash balance funding level for the principal’s ranges from $88,000 to $143,700 (noting that this difference is due to difference in age) for a combined contribution total ranging from $119,200 to $143,700.
The combined plans can also be layered with life insurance up to the maximum amount allowable under Treas. Reg 1.401-1(b)(1)(i) which is an amount less than 100 times the projected monthly retirement income. As interpreted under Rev. Rul. 74-307 generally, 33% of defined benefit contribution may be used for whole life insurance premium. This option (Table 2c) allows the participant to purchase life insurance with taxdeductible dollars; therefore, the tax deductible contribution is increased.
The three tables clearly illustrate the significant contribution increases that are attainable via a Cash Balance Plan and/ or “Combo” plan versus a traditional contribution plan. It also becomes apparent that these plans can be flexible to meet the needs of the individual as well as the group. It should be noted that with respect to partnerships each partner can have their own contribution amount; this amount can be determined by percentage of pay or a flat dollar amount. Tax deductions on behalf of non-partner employees are taken on the partnership return while deductions for partner contributions are taken on their personal returns. Cash Balance Plans are qualified plans that have the same tax effect of reducing ordinary income dollar for dollar. With many partners in the 45% tax bracket the saving from contributions become significant to the practice.
If your group has been looking for an alternative vehicle to maximize retirement funding, gain additional tax deductions and meet the characteristics listed above a Cash Balance Plan may be a viable option for your group.
We would like to thank Jacob, Haxton & Boord, LLC (www.jhbllc.com) for their assistance with this article.
Josephine Ballard, MS, Financial Manager for ABC has been with ABC for two years and is part of the division of Financial Management and Consulting Services. She is responsible for financial and strategic practice management for anesthesia clients nationwide. She has twenty years of experience in private practice management as well as serving as an Administrative Director in anesthesia/pain-based ASCs. Josephine has earned a Master Degree of Science from CUNY–Queens with a concentration in health care administration.