RETIREMENT SAVINGS
“... like any qualified retirement plan , assets are protected from creditors . And by greatly adding to retirement savings , cash balance plans help you to be better prepared for succession planning .”
contributions and interest credited each year at a stated rate of interest . Retirement benefits are generally paid out as a lump sum payment of the hypothetical account balance and are eligible for rollover , but they can also be paid in the form of a monthly benefit as defined in the plan document .
Cash balance plans are less confusing to participants because the hypothetical account appears to be a real account balance , and are generally more valued by younger workers due to its portability .
WHY CONSIDER A CASH BALANCE PLAN ? Cash balance plans , either alone or in combination with your existing 401 ( k ) plan , give you the opportunity to shelter a substantially larger amount of your profits in a very tax efficient fashion . Because cash balance plan limits are stated in terms of annual benefits at normal retirement age rather than in deductible contribution amounts , older participants ( in their mid-40s and up ) can accumulate significantly larger account balances compared to those in a DC plan in a relatively short period of time . The current low interest rate environment tends to increase the contribution required due to the effect of a low interest rate in the actuarial calculations .
In addition , like any qualified retirement plan , assets are protected from creditors . And by greatly adding to retirement savings , cash balance plans help you to be better prepared for succession planning .
WHO IS A GOOD CASH BALANCE PLAN CANDIDATE ? Cash balance plans are NOT for everyone .
Benefit levels are set high to generate large , mandatory , tax-deductible contributions ( usually from $ 100,000 to $ 200,000 , or more ) and as an employer , you take on the risk of ensuring that these promised benefits are funded , regardless of the investment performance of plan assets . Potential candidates for these plans include the following :
1 . Companies that have established strong and stable cash flow and profitability patterns
2 . Professional firms or entrepreneurs who may have neglected personal retirement savings while building their practices or companies , who are now older , who have a company with the financial characteristics stated above , and who now have a need to catch up on years of savings
3 . Employers who have employee demographic characteristics that include :
i . A low ratio of rank-and-file employees to owners / highly compensated employees
ii . A large age gap between employees and owners , with employees being younger than owners
4 . Companies who are already contributing amounts to employees in the range of 3 %– 4 % of pay . While cash balance plans are designed to benefit highly compensated employees / owners , they normally provide minimum contributions to other employees in the range of 5 %– 7.5 % of pay in either the cash balance plan or a separate 401 ( k ) profit sharing plan .
HOW DO I LEARN MORE
ABOUT THESE PLANS ? Cash balance plans can take a month or more to set up , and they are more expensive to establish and maintain than a 401 ( k ) plan . In the right circumstances , however , these plans can provide exceptional tax efficiency while significantly enhancing the retirement readiness of business owners and their select highly compensated employees . If you have questions on this article or are interested in learning more about cash balance plans , please contact Marci Boyarski at Wipfli LLP . +
BY : MARCI BOYARSKI CPA , SENIOR MANAGER , WIPFLI , LLP
Marci Boyarski , CPA | Senior Manager | Wipfli LLP | Office : 715.858.6672 | Fax : 715.832.0475 | 3703 Oakwood Hills Parkway , Eau Claire , WI 54701
1 Approximate amount necessary to generate the 2016 annual benefit limit under IRC § 415 of $ 210,000 per year .
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