Cash Balance Pension Plans

RPAS is dedicated to you and your client, which means we are able to offer you as many different retirement plan services as possible, including Cash Balance Pension Plans.

Advantages of a Cash Balance Pension Plan

  • Larger tax-deductible contributions may be made compared to those permitted for defined contribution plans.
  • Retirement savings may be accelerated for targeted employees.
  • Funding costs are more easily understood and planned by the plan sponsor (budgeting based generally on percents of compensation).
  • Plan design can favor owners and/or key employees to the extent they are older than staff (like New Comparability, but even better).
  • Tiered benefit levels are especially attractive for partnerships and professional groups with varying levels of ownership and compensation among owners.
  • May limit the number of employees covered (must be 40% or more of employees), as long as each participant is provided a meaningful benefit.
  • Participant does not bear the investment risk.
  • Account balances are easier to understand and more meaningful to participants compared to benefits under a traditional defined benefit pension plan.
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Cash Balance Pension Plans are Good for the Following

(Especially if a Combination Plan – See Below)

  • Partners (or owners of successful family businesses and closely-held businesses) who want to contribute more than $51,000 / $56,500 (2013 limits).
  • Firms with patterns of consistent and sustainable profits.
  • Firms who can contribute at least 5% - 8% of compensation on behalf of employees.
  • Partners over age 40 who desire to increase tax deferrals or to catch up on pension savings.
  • Small special situation tax shelters such as a doctor’s office – with careful advance planning, consideration may be given to fund in excess of theoretical Section 415 limits; in this way, look at the cash balance plan as a tax-deferred corporate account to “fund” other projects by freeing up future monies through excess accumulations; however, an issue to resolve in advance may be how to allocate any over-funding upon departure of any of the owners.
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Some Prominent Features of a Cash Balance Pension Plan

  • Higher contributions - contributions to fund retirement benefits can significantly exceed the 401(k) plan maximum ($51,000 or $56,500 in 2013 with catch-up).
  • A defined benefit pension plan that looks like a defined contribution plan.
  • Participant accounts:
    • Participants have hypothetical accounts which function in a manner similar to profit sharing plans.
    • Accounts are credited with an employer contribution credit plus an interest credit (fixed or variable, set in the plan document).
    • Participant may receive account balance on termination.
  • The employer must fund enough each year to keep plan assets on course to pay the promised benefits.
  • Easier to understand than traditional defined benefit pension plans:
    • Benefits are more easily understood by the participant and meaningful (the lump sum at any time equals the vested hypothetical account balance).
    • Participant receives an annual statement that shows an account balance.
    • Funding costs are understandable for the plan sponsor.
    • Contribution credits for the staff may be the same percentage of compensation.
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Some Disadvantages to Consider

  • Administrative costs may be higher than defined contribution plans.
  • Annual minimum contributions are required.
  • Employer bears the investment risk.
  • Employer must coordinate the investment policy with the funding policy and actuarial methodology (with help from the consulting actuary and the investment advisor).
  • Annual funding costs must be determined and certified by an Enrolled Actuary, based on extremely complex and evolving funding rules.
  • Must have full vesting after 3 years.
  • Plan may be required to pay PBGC premiums.
  • Can only be set up using an individually designed plan document.
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Combination Plan

A Cash Balance Pension Plan Combined with a 401(k) Profit Sharing Plan

A cash balance pension plan, when combined with a 401(k) profit sharing plan and cross-tested together, can bring even greater benefits. Total contributions and benefits allowed for targeted employees may greatly exceed annual benefit limits permitted under a defined contribution plan by itself. Here are illustrative 2013 plan year contribution limits for combination plans under near optimum conditions:

Age Cash Balance Pension Plan 2013* + Defined Contribution Pension Plan 2013 = Total 2013*
 45 $ 109,000   $ 51,000   $ 160,000
 55 $ 179,300   $ 56,500   $ 235,800
 65 $ 237,300   $ 56,500   $ 293,800

* Different amounts will result for each plan combination, depending on normal retirement age, interest rates and credits, employee group demographics and benefit levels for non-highly compensated employees; RPAS will optimize the 2-plan design to achieve the best results.

In addition, the Pension Protection Act’s elimination of the 25% of covered payroll deduction limit with multiple plans allows for much higher contributions for pension plans covered by PBGC.
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Bring in the Experts to Design the Right Plan for You

For over 30 years, RPAS has been designing and administering effective retirement plans for clients large and small, and we know how to make financial advisors look good to their clients! Contact us now to request a plan illustration.