Cash Balance Plans
This IRS-qualified plan allows extremely large annual contributions and tax savings. You can optimize your savings by combining a Cash Balance plan with a defined contribution plan, such as a 401(k) plan. Cash Balance plans often work best for small businesses that have consistent cash flow and high profit.
Build Wealth for Owners
Contribution limits in a Cash Balance plan are much higher than in a 401(k) plan. By using both plans, owners can supercharge their annual retirement savings.
How Cash Balance Plans Work Best For Small Businesses
Cash Balance plans are a type of defined benefit plan that offers small business owners and their employees a number of unique features and options for retirement savings. These types of retirement plans have their pros and cons and are designed to provide employees with a guaranteed retirement benefit and employers with tax benefits. Employers are responsible for funding the plan and bearing the investment risk associated with the plan’s assets.
Cash Balance plans offer higher contribution limits compared to traditional defined contribution plans. This allows small business owners to save more for retirement while also reducing their tax liability. This feature can be particularly beneficial for small business owners who want to maximize their retirement savings potential.
Cash Balance plans provide employees with a guaranteed retirement benefit, which is based on a predetermined formula. This provides employees with a predictable income stream during retirement, giving them peace of mind in knowing they will have a secure retirement. This feature can also help small business owners attract and retain top talent.
Cash Balance plans offer small business owners flexibility in selecting which employees are covered. This allows them to tailor the plan to their specific needs and budget. This feature can be particularly beneficial for small business owners who have a diverse employee population or who want to provide a retirement benefit to specific employees.
Cash Balance plans offer increased retirement savings potential for older, high-earning employees who may not be able to maximize their savings through traditional defined contribution plans. This allows them to quickly catch up on their retirement savings and prepare for a secure retirement.
Cash Balance plans offer small business owners the potential to reduce their tax liability by taking advantage of tax deductions associated with contributions to the plan. This can help them keep more of their hard-earned money and reinvest it back into their business.
Cash Balance plans offer small business owners plan termination options, allowing them to wind down the plan if needed. This offers flexibility for changing business needs or circumstances.
Cash Balance plans offer investment growth potential through interest crediting rates. The rate at which the plan’s investments grow may be fixed or variable depending on the plan design, providing opportunities for investment growth.
Cash Balance plans offer protection for employees through PBGC insurance. In the event a plan does not have sufficient funding to cover employee benefits, PBGC will pay the benefits provided by the employer’s plan. This provides employees with an additional layer of security and can help small business owners attract and retain top talent.
Flexible Employee Contributions
Cash Balance plans are required to cover only 40% of eligible employees (which includes owners). Owners can minimize contributions by including younger and lower paid employees or they can choose to reward specific employees by including selected employees.
- Minimize contributions to employees
- Selectively reward employees
Tax Savings with Cash Balance Plans
Small businesses can use a retirement plan to reduce taxes. When it comes to retirement plans, small businesses have several options, including traditional defined benefit plans and Cash Balance pension plans. While traditional defined benefit plans offer a guaranteed monthly pension payment to participants, Cash Balance plans offer participants an account balance that grows based on a predetermined interest rate. This can be a more attractive option for employees who prefer to see their retirement savings grow in a more tangible way.
Deductible Expenses
Many plan expenses including company contributions, setup fees, and administrative costs are tax deductible, so they reduce your tax bill. Since owners can contribute from $100,000 – $400,000 to their personal account each year, the corresponding tax savings are also massive.
Tax Credits
Small businesses can claim a tax credit of up to $5,500 each year for 3 years. The tax credit can offset 100% of eligible costs including setup, administration, record-keeping, advice, and employee education.
Employers who contribute to employee accounts can also receive tax credits of up to $1,000 for 5 years for those contributions.
Recruit and Retain Employees
Owners can selectively include certain employees in a Cash Balance plan, which improves employee productivity and attitude. Small businesses can improve their employee benefits package for current and prospective employees by including those employees in the plan. Our plans offer:
- Selective rewards for employees
- Portability
- Appealing benefits package
- Asset protection
Difference Between a Cash Balance Plan and a Traditional Pension Plan
Pricing for Cash Balance Plans
| Cash Balance Plans | Traditional Pension Plans | |
|---|---|---|
|
Benefit Calculation |
Based on a hypothetical account balance that grows with each annual contribution and interest credit. |
Based on a formula that takes into account the employee's years of service and salary history.
|
|
Benefit Guarantees |
Benefit Guarantees
Insured by the PBGC, but the benefit guarantees are based on the hypothetical account balance rather than a specific benefit formula.
|
Insured by the PBGC based on a specific benefit formula.
|
|
Investment Risk |
Borne by the plan and not the employer, as the plan is required to provide a minimum interest credit to employees. |
Borne by the employer, who is responsible for ensuring that the plan has sufficient funds to pay out benefits. |
|
Contribution Limits
|
Generally have higher contribution limits than traditional pension plans, allowing employees to save more for retirement each year. |
Lower contribution limits than cash balance plans, but still provide valuable retirement benefits to employees. |
|
Flexibility |
Offer more flexibility than traditional pension plans, allowing employers to adjust contribution levels and choose from a variety of interest crediting rate options. |
Less flexible than cash balance plans, but still provide a valuable retirement benefit to employees based on a specific formula. |
Our Cash Balance plans have a one-time setup fee and a quarterly management fee that vary based on the number of plan participants. Cash Balance plans are typically much more cost effective than 401(k) plans because of the significantly higher tax savings and retirement contributions they allow. Contact us for a no-cost proposal including pricing.
Employer price
$1,000 + $124 per participant (contributing $15,000 or more) + $24 per participant (contributing less than $15,000) (per quarter)
Asset price
| Plan Assets | Quarterly rate |
|---|---|
| Up to $1.5 million | 0.250% |
| $1.5 – 3 million | 0.225% |
| $3 – 5 million | 0.200% |
| $5 – 10 million | 0.175% |
| $10 – 25 million | 0.150% |
| $25 – 50 million | 0.125% |
| Over $50 million | 0.100% |
*Minimum quarterly fee is $1,000
2 owner participants, 7 employee participants, $1.8 million in plan assets
Employer price = $1,000 + (2 x $124) + (7 x $24) = $1,416
Asset price = $1,800,000 x 0.00225 = $4,050
Total price = $1,416 + $4,050 = $5,466 (per quarter)
Simple Management for Cash Balance Plans
Business owners receive ongoing support from a dedicated retirement plan specialist whose focus is making management of your plan easier. We provide:
- Customized plan design
- Government filing
- Compliance testing
- Plan administration
- Dedicated plan website
- Client service team
- Real-time reports
- Actuarial services
Experts You Can Trust
We partner with the best in the industry so you work with world-class professionals to design and administer your plan.
Widely recognized as the nation’s leader in Cash Balance plan design, FuturePlan has been designing and implementing plans since 1989. They serve over 4,000 Cash Balance clients across all industry sectors ranging in size from owner-only plans to plans with over 1,500 participants.
We work with small businesses to design IRS-qualified retirement plans that meet the needs of owners and employees. We support plan sponsors and participants to ensure long-term satisfaction for both owners and employees. We are experts in 401(k) and Cash Balance plans.
Frequently Asked Questions
A Cash Balance plan is a type of employer-sponsored retirement plan. There are two general categories of retirement plans: defined benefit and defined contribution. Because Cash Balance plans offer advantages of both defined benefit and defined contribution plans, they are often called “hybrid” plans. These plans allow for the larger tax deductions and accelerated retirement savings of a defined benefit plan, while maintaining the flexibility and portability of a defined contribution plan.
A Cash Balance plan provides a specific benefit at retirement for each eligible employee. Participant accounts grow annually in two ways: the company contribution and an interest credit. The company contribution is based on a percentage of pay or a flat dollar amount. The interest credit is guaranteed rather than being dependent on the plan’s investment performance. Because of this, participants can count on stable growth.
Because a Cash Balance plan is a defined benefit plan, it allows for annual contributions based on participant salary and age. To provide for this specified benefit, the plan is allowed to accept contributions that are significantly larger than those in a defined contribution plan like a 401(k). These large Cash Balance plan contributions are generally tax deductible and can therefore provide sizable tax savings.
Yes. Contributions made by the employer to a Cash Balance plan are generally tax-deductible providing significant tax advantages to the business.
No. Contributions are made solely by the employer.
Cash Balance plans help business owners and partners accelerate their retirement savings and realize significant annual tax deductions. Because annual contribution limits for a Cash Balance plan are much higher than other retirement plans, the tax savings can be much more substantial. Cash Balance plans allow the employer to select specific participants, offer asset protection, and enhance employee recruitment and retention.
Yes. Cash Balance plans are nearly always used in combination with a 401(k) Profit Sharing plan to provide maximize benefits and flexibility to owners and to pass compliance testing.
Eligible employees are typically those who are at least 21 years of age, have worked at the company for at least one year, and who worked at least 1,000 hours during the year. Of these eligible employees, a Cash Balance plan must cover 40% of them with a maximum of 50 employees requiring coverage.
A Cash Balance plan may be a good fit for your business if some of these are true:
- Partners or owners want significantly larger tax savings and are able to contribute large amounts to their retirement accounts.
- Businesses that have consistent profits.
- Partners or owners desire to accelerate saving for the future.
- Businesses that are willing to contribute between 5% to 7.5% of salary to eligible employees, which includes existing 401(k) and profit-sharing contributions.
- Partners or owners have personal annual income greater than $250,000 and are seeking an annual tax deduction of $50,000 or more.
- Business owners or partners are generally older than the employees.
No. Cash Balance plans can be adopted by businesses of any size include single person companies.
Not usually. Unlike 401(k) plans where participants may invest in stocks or funds that fluctuate with market performance, Cash Balance plans are typically not directly tied to the stock market. Instead, benefits provided to participants in Cash Balance plans are predictable because they are based on a pre-determined formula set by the employer and are not directly influenced by stock market movements.
Yes. However, the maximum contribution is determined by factors including age and compensation rather than the fixed amount that is allowed in a 401(k) plan. Contributions to a Cash Balance plan are often $100,000 – $400,000 per year.
Yes. Cash Balance plans have the benefits of IRS-qualified plans including tax deductibility, tax-deferred growth, asset protection from creditors, and availability to rollover funds to another qualified plan like an IRA or 401(k).
The maximum annual contribution is determined by factors including age and income. Contributions to a Cash Balance plan are often $100,000 – $400,000 per year.
The tax savings is determined by the annual contribution to the plan. Since contributions to a Cash Balance plan are often $100,000 – $400,000 per year, those in the highest tax bracket can save approximately $45,000 to $180,000 per year.
Unlike a 401(k) that typically benefits all employees, a Cash Balance plan must benefit only 40% of eligible employees up to a maximum of 50. The covered employees can include owners and partners, which reduces the number of non-owner employees that need to be covered.
Yes. Most Cash Balance plans use a 3-year vesting schedule so participants are 100% vested after 3 years of service at the company.
Cash Balance plans offer retirement benefits that are fully funded by the employer and more predictable than traditional retirement plans, which can make a company more appealing to job seekers and encourage existing employees to stay. Additionally, vesting of benefits in a Cash Balance plan rewards long-term employees, which reinforces their commitment to the company.